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Fostering a newly defined entrepreneurship in impoverished communities: a key component of the solution for eradicating poverty in America
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Content
FOSTERING A NEWLY DEFINED ENTREPRENEURSHIP
IN IMPOVERISHED COMMUNITIES:
A KEY COMPONENT OF THE SOLUTION FOR ERADICATING POVERTY
IN AMERICA
by
Sachidanand Sinha
A Dissertation Presented to the
FACULTY OF THE SCHOOL OF POLICY, PLANNING,
AND DEVELOPMENT
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PLANNING AND DEVELOPMENT STUDIES
May 2008
Copyright 2008 Sachidanand Sinha
ii
Acknowledgments
The author is most grateful to Professor Raphael Bostic for his patient and incisive
guidance of this research through several course corrections. Without his detailed
reviews for accuracy and precision this effort could not have been completed. The
author is also grateful to Professor Harry Richardson for instilling a sense of
moderation in expectations of results in a complex social environment, especially
when it comes to individual and community’s roles in perpetuation of poverty. Help
received from Professor Neeraj Verma during the early stage of this project is
acknowledged
Suggestion during the dissertation defense from Professor Michalle Mor Barak
for building the solution starting from a known success story and Mr. Jerry
Groome’s question regarding the specific application of the solution to poor
communities were extremely helpful. The author acknowledges with gratitude the
help of Mr. James B.Thomson of Federal Reserve Bank of Cleveland who always
returned phone calls promptly to discuss ideas behind this project and even sent his
published article. The author was gratefully surprised by the kindness of Professor
William Julius Wilson who responded to a question on urban poverty with an
exhaustive e-mail within a matter of days. The help with data from Mr. James J.
Hammersley of the Small Business Administration (SBA) and Mr. Dean Jolliffe of
the Economic Research Service, U.S. Department of Agriculture, is also
acknowledged. Finally the author thanks Dr. Paul Weisser who has done an excellent
job of editing the manuscript.
iii
Table of Contents
Acknowledgments ii
List of Tables v
List of Figures vi
Abstract vii
Introduction 1
Chapter 1: The Challenge of Poverty in the American Context 10
Poverty Redefined 10
Poverty in America: The Who and the Why 15
The Urban Poor 16
Race 17
Segregation 19
Structural Economic Changes 21
Lack of Education 22
The Underclass Mentality: Drugs, Violence,
and Teenage Pregnancy 23
The Suburban Poor 24
The Rural Poor 25
Closing Remarks 28
Chapter 2: Federal Programs to Alleviate Poverty 30
Historical Review 30
The Key Programs: Their Successes and Failures 33
Job Training and Youth Development Programs 34
Health-Care and Subsistence Income Programs 39
Low-Income Housing and Neighborhood Development Programs 43
The Business Assistance Program 48
Closing Remarks 51
Chapter 3: Determinants of Poverty Eradication Theory 52
Community Economic Development (CED) 54
CED as a Collective Socioeconomic Process 55
Economic Development Versus Economic Growth 56
Schumpeterian Versus Other Conceptions of Entrepreneurs 63
Entrepreneurship Redefined: The New Entrepreneur 64
iv
Chapter 3: Determinants of Poverty Eradication Theory (cont’d)
Can New Entrepreneurial Skills and Attitudes Be Acquired? 71
The New Entrepreneur as an Antidote to Dependency 75
Survival Entrepreneurship Capital in Impoverished Communities 77
Entrepreneurship/Self-Employment Among Native-Born Blacks 79
Closing Remarks 85
Chapter 4: The New Entrepreneurial Initiative (NEI) 86
Overview 86
Turning Challenges into Economic Opportunities 88
Resemblance to President Clinton’s New Market Initiative 89
Dealing with the SBA’s Culture 90
Precedents, Risks and Rewards of Public Venture Capital Financing 91
Fostering New Entrepreneurship in Impoverished Black Communities 96
Local Politics, Community Organizations, Crime and Violence 98
Rationales for 100 Percent Public Venture Capital Financing 102
Sources of Capital 104
Why the SBA Must Help to Create the Public Venture Fund 105
NEI and the Local Governance 111
Responses to Points That Critics May Raise 113
The NEI’s Local Operation and Entrepreneurial Support System 116
Implementing the Program 117
References 122
v
List of Tables
Table 1: Poverty Among Individuals by the Official Poverty Measure 14
Table 2: Urban and Rural Poverty Differences in the United States (2003) 16
Table 3: High Poverty Neighborhoods and Their Populations 18
Table 4: Educational Attainment of Adults, by Neighborhood
Poverty Level, 1990 23
Table 5: Population and Poverty Characteristics of the Central Core
of the Metropolitan Areas Versus Areas Outside the Central Core
But Within the Metropolitan Areas 25
Table 6: The Odds of Non-Metropolitan Residents Being in Poverty 28
Table 7: Some of the Community Action Initiatives Started by
President Johnson 33
Table 8: System of Housing Programs 44
Table 9: Rank of Mean Self-Employment Rates by Race and
Place of Birth Within 167 U.S. Metropolitan Areas 80
Table 10: SBA Loan Approvals: Fiscal Years 2004–2006 108
vi
List of Figures
Figure 1: A Multipronged Approach of the Government for Poverty
34
Figure 2: Force Interactions Between the NEI and Persistent Poverty 53
Figure 3: Organization Chart for the NEI 88
Figure 4: Implementation Steps for the NEI 121
vii
Abstract
This study takes a fresh look at why high levels of poverty persist in certain
American neighborhoods despite billions of dollars having been invested over
decades by the government. To overcome this problem, the author proposes a New
Entrepreneurial Initiative (NEI) as a policy solution. The thesis of the NEI is that to
eradicate persistent poverty it is essential to foster self-reliance in the affected
communities through entrepreneurial innovations.
Income subsidy programs, although temporarily helpful, cannot banish long-term
poverty because they do not remedy impoverishment of capability, a strong
component of the poverty equation, as demonstrated by Sen (1992, 1997,1999).
Furthermore, persistent poverty is not entirely an individual phenomenon. The
neighborhoods and spaces in which the poor live play important roles in poverty’s
continuance. Thus any solution paradigm should involve the community or
neighborhood as an important actor. The poverty eradication formula must
structurally transform the community’s economy from poverty and isolation to
prosperity. For that reason, two important economic concepts have played significant
roles in the design of the NEI. First is the Shumperian (1934/1983) concept of
“economic development” where entrepreneurial innovations structurally transform
an economy to a new level. The second is the concept of “Community Economic
Development” (Diochon 2003) where community participation is critical in
achieving economic development.
viii
Because poverty among blacks is the most extreme and concentrated in the
nation, NEI’s first launch will be in impoverished black communities. The evidence
suggests that, under the right circumstances with enabling assistance, some members
of impoverished black communities, through innovation, will be able to turn
challenges into economic opportunities. The NEI incorporates a comprehensive
entrepreneurial support system for technical assistance and mentoring. It also has a
provision for a public venture capital system that can finance innovative enterprises.
Since the private venture capital industry does not finance moderate growth
enterprises, no matter how innovative, public venture capital will have to take up the
challenge.
The NEI is not poverty specific. It is innovation specific. It can be expanded to
finance innovations in new energy technologies and manufacturing around the
country in order to enhance American competitiveness.
1
Introduction
This research identifies determining factors in the perpetuation of poverty in
America and proposes a new policy solution for its eradication. The solution is
comprised in a New Entrepreneurial Initiative (NEI) which shifts the focus of
poverty policy from a welfare regime to self-reliance. The NEI promotes a policy of
building capacity in local entrepreneurial innovations to turn the challenges of these
communities into opportunities.
It is determined that conventional and governmental definitions of poverty,
based on quantitative measures of income alone, are incomplete. For that reason,
income subsidy programs are not likely to succeed in eradicating poverty, since
poverty is not simply an economic issue, but also encompasses deprivation of
capability (Sen, 1973, 1992, 1997, 1999). An ingrained culture of poverty evoked by
Sen, Harrington (1965), Hurley (1969), Wilson (1987, 1989, 1996), Jargowsky
(1996), and Duncan (1999) directly affects the capabilities of the poor, resulting in
psychological distortion. This distortion is manifested in long-term social and spatial
isolation from the mainstream population and inculcates feelings of humiliation and
hopelessness. Job training, welfare to work, and particularly youth development
programs have had some impact on capacity building and income, but not enough to
move people out of economic poverty, let alone overcome their psychological issues.
The training is limited, vocational, and specific to job search and not enduring or
remedial in creativity or initiative, which can play a positive role in solving poverty.
2
The evidence indicates that poverty has spatial and neighborhood dimensions
(Jargowsky 1996). Although individuals bear some responsibility for their poverty,
where they live and with whom, also affects their impoverishment. One example of
the impact of space on poverty is Weber and Jensen’s (2004) conclusion of “rural
effect” that persons of the same economic means living in a rural area are more
likely to be poor than they would be if they lived in an urban area. Hence, the
solution for poverty sought in this dissertation is also communitarian.
The evidence is strong that poor blacks who live in urban ghettos or rural areas
are the extreme sufferers of persistent poverty. Jargowsky (1996) goes so far as to
suggest that if there were no black poverty, there would be no poverty problem in the
United States. The primary reasons for this extreme black poverty, according to
many authors, are segregation and discrimination (e.g., Duncan, 1999; Fetchen,
1981; Jargowsky, 1996; Massey & Eggers, 1990; Wilson, 1987, 1996). These
repressive forces took root in the “Jim Crow” laws of the 1890s (Butler, 2005; Green
& Pryde, 1996). For these historical reasons, the paradigm that this dissertation
proposes for the solution of poverty uses black poverty as a template. As Green and
Pryde (1996) suggest:
Black economic progress does not depend on renewed struggle for
unattained civil rights…. Nor does it depend on the…acronymic
jungle of social welfare programs…. Eventually, Black economic
development must rely on successful risk taking and innovation.
(p. vii)
3
A body of poverty literature deals with the cultural impairment in the Black
community caused by drugs, crime, immediate gratification, and the antisocial
attitude of the youth (e.g., Kelso, 1994; Light, 1972; Sowell, 1981). The data also
suggest that black Americans are not inclined toward self-employment and
entrepreneurship (e.g., Kelso, 1994; Portes, 1995; Wilson, 1996). These are
preferable routes to prosperity for communities that face discrimination (Fairlie,
2004; Kelso, 1994).
On the other hand, another body of literature suggests that, prior to the enactment
of the Jim Crow laws, blacks were as active in business formation as Whites, and
there were numerous cases when slaves saved money to buy their freedom and set up
enterprises. During the period just before Jim Crow, blacks developed enterprises in
manufacturing, construction, and transportation, and built their own churches and
schools (e.g., Butler, 2005; Green & Pryde, 1996; Minton, 1913; Pierce, 1947). The
extensive list of black enterprises in this literature provides strong evidence of the
entrepreneurial capability in the black community. It can be argued, then, that the
current manifestation among blacks of symptoms of underclass mentality and lack of
interest in constructive entrepreneurship is at least partly the result of the situation
created during a long period of deprivation.
Nevertheless, it cannot be denied that a large number of blacks took advantage of
affirmative action programs, or found some other way on their own, to become
successful enough to join the middle class. Some of these middle-class blacks are
extremely successful and have built large enterprises, although most of them have
4
moved out of their original communities. It is clear, then, that there is nothing
genetic among blacks about being non-entrepreneurial.
Based on everything said above, it is safe to assume that the poverty-induced
capability deficit is not of a permanent nature. This finding, along with the data that
the entrepreneurial route is more rewarding for minorities, strengthens the basis for
the proposed entrepreneurial solution, which relies on rebuilding the capability of the
residents of impoverished communities in the environment of freedom of choice
(Sen, 1999). This capability will be rebuilt in minority individuals through self-
learning under the mentoring of proven entrepreneurs. The entrepreneurial learning
also involves openness and sharing within the community, elements that are the
cornerstones of Community Economic Development (Diochon, 2003). Various
social scientists and economists have presented evidence, especially Harper (2003),
that this approach is likely to enhance entrepreneurial attributes such as self-efficacy.
Innovation as the goal of entrepreneurial pursuit is important because it alone can
change economic structure (Schumpeter, 1934/1983). Mundane businesses such as
liquor stores or other small neighborhood stores will not do. An impoverished
community faces many economic challenges. Turning those challenges into
opportunities will require entrepreneurial innovation. Furthermore, innovation need
not always be complex and high-tech, but may be commonsense solutions that can
make life easier for people, and it can be within the reach of creative persons with
little formal education. The opportunity to create commonsense innovations should
5
be a strong motivator for those minds in the community that silently tinker with new
ideas or gadgets.
The “new entrepreneur” is the primary enabler of the New Entrepreneurial
Initiative (NEI) but not without the support system and the 100 percent financing
incorporated in the NEI. The support system provides the learning and mentoring of
the new entrepreneurs from their entry into the program until their innovation-based
enterprises are self-sustainable. The NEI support system will be structured to induce
horizontal and vertical entrepreneurial efforts likely to result in “swarming” within
the community (Schumpeter, 1934/1983). Multiple entrepreneurial efforts dispersed
over the community landscape are expected to result in a kind of “economic
development” that will change the structure and level of the economy, since the
existing one is not acceptable.
Public venture capital envisioned in the NEI to fund the enterprises started by
low-income entrepreneurs is a logical choice, since private venture capital is limited
and follows a “herding” trend, such as only financing information technology (IT)
industries. The social good requires all kinds of developmental work, and for that
purpose public investment is needed to diversity the industrial base (Lerner, 2004).
At the same time, this new entrepreneurial solution is not proposed as the sole
and cure-all remedy for a society inflicted with long-term poverty, but as the core
transformational element that will finally eradicate poverty. It is not expected that
every member of the community will be an entrepreneur. Every community has
leaders and soldiers, employers and employees. The employees are needed to carry
6
out the tasks for completing innovations. Additionally, to ensure the overall
wellbeing of the community, it may be necessary to continue the current welfare
programs for the old, young, and disabled.
The entrepreneur-driven “economic development”, which forms the basis for the
poverty eradication theory and the NEI, is Schumpeterian (1934/1983) in character
and is distinguishable from simple “economic growth.” But the NEI’s economic
development does not happen by “fits and starts” like Schumpeter’s, and it is not
earth shattering and global like Schumpeter’s. Rather, it is modest in scope and is
shared within the community, resembling Diochon’s (2003) Community Economic
Development (CED).
The dissertation develops the poverty-solution paradigm in a step by step
process. First, it redefines poverty to include capability deficit as a prime component
in its equation. It also identifies who is poor in America. Second, it describes existing
poverty programs and articulates why these programs could not eliminate poverty.
Following that, it develops a theory for eradicating persistent poverty in America by
placing the newly defined entrepreneurship at the center of the transformation
process. Finally it puts together an architecture of a New Entrepreneurial Initiative
(NEI) capable of implementing the theory.
The dissertation is comprised of four chapters that deal with the four important
issues mentioned above. Chapter 1 begins with a discussion of the current measure
of poverty and the setting of a “poverty line” by the U.S. Census Bureau, which
originated with the thresholds created by Orshanky (1964) for the Social Security
7
administration. The chapter then redefines poverty to include capability deficit and
addresses the impact of relative deprivation in countries that are generally rich, as
suggested by Sen (1992). It discusses poverty indices, known as Poverty Measure S,
which was developed by Sen (1973, 1976), and Human Poverty Indices (HPIs),
which were developed jointly by Sen and Anand (1994, 1997) for the United Nations
Development Program (UNDP). The second part of this chapter details who is poor
in America and why, including urban and rural poor. Impacts of race, segregation,
drugs, crime, and violence are also discussed.
Chapter 2 traces the history of government intervention in the alleviation of
poverty, starting with President Roosevelt’s New Deal, which included the Social
Security Act (SSA) and the Works Progress Administration (WPA). It discusses
President Eisenhower’s Small Business Act of 1953, and President Johnson’s Great
Society Program, as well as his sponsored legislation, such as the Equal Opportunity
Act of 1964, the Voting Rights Act of 1965, the Housing and Urban Development
Act of 1965, Medicaid (1965), and Medicare (1965).
For the purpose of analysis, the government poverty programs are divided into
four categories. The discussion of each category of poverty programs highlights their
successes and failures: (1) job training and youth development programs; (2) health-
care and subsistence-income programs; (3) low-income housing and neighborhood
development programs; and (4) business assistance programs. The chapter ends with
the conclusion that most of these programs have immensely helped the low-income
and the poor, children, the aged, and the disabled, but they have not helped to raise
8
income enough for people to get out of the poverty cycle. Most important, they have
not remedied the more fundamental causes of poverty.
Chapter 3 addresses the core issues pertaining to the solution of poverty. The
chapter lays out the details of the concept of Community Economic Development
(CED) and why it is a desired outcome of the proposed poverty eradication program.
In that process, the chapter illustrates the Schumpeterian (1934/1983) concepts of
entrepreneurship, economic development, and economic growth, along with other
concepts in the literature, and carves out new models of entrepreneurship and
economic development. The “new entrepreneur” is an innovator like Schumpeter’s.
He or she does not have to own capital or the enterprise where the innovation takes
shape, which is an extremely important point for communities that possess little
capital. The innovation may be in the form of a product, a process, a mechanism for
organization, or a mechanism for finance, but it must be new, in the sense that it
changes the structure of the old system and elevates it to a higher level. It is also
important that pursuit of the innovation not employ existing resources of the
organization, and that the funds preferably be raised through credit, as in
Schumpeter’s model.
The chapter 3 also includes a description of the differences between the “new
entrepreneur” and Schumpeter’s, as well as other entrepreneurs described in the
literature. It is argued that the required entrepreneurial skills can be a learned
outcome and can be acquired by members of the impoverished communities, just as
in any other community. Reference is also made to the entrepreneurial ability that is
9
developed during the struggle for survival when one is poor, which can be harnessed
to form the capabilities for constructive projects (Kelly, 1995; Green & Pryde, 1996).
The chapter also covers the history of and the potential for self- employment and
entrepreneurship in impoverished black communities.
Chapter 4 presents the New Entrepreneurial Initiative (NEI) to foster innovations
in the poor communities. The NEI will be managed by an independent body of
successful founders of companies and officials with experience and reputation in
community rebuilding. A public venture fund is articulated to finance the multi-
disciplined innovations since private venture capital works only in niche areas. It is
suggested that the role of the NEI and the public venture fund should be extended to
finance innovations in the country to enhance American competitiveness.
10
Chapter 1:
The Challenge of Poverty in the American Context
Poverty Redefined
From a policy perspective, the principal measure of poverty has been established
by the Office of Management and Budget’s (OMB) Statistical Policy Directive 14,
which frames poverty in terms of a household’s income, size, and age composition.
Poverty is determined by comparing a household’s income with a pre-tax money
income threshold that varies with family size and composition.
1
The threshold, often referred to as the “poverty line,” is designed to represent the
level of a household income that is three times the food budget for families under
economic stress as determined by the U.S. Department of Agriculture. It is assumed
that if a family’s total income is lower than the appropriate threshold, then the family
and every individual in it is in poverty. The same poverty thresholds are used
throughout the United States (U.S. Census Bureau, 2005). The National Academy of
Sciences has suggested changes to this threshold to account for geographic
differences in housing costs, non-cash benefits, and work-related, health, and child-
care expenses, but this recommendation has not yet been implemented.
1
This poverty threshold was originally conceived and developed by Orshanky in1964. Originally,
there were 124 different poverty thresholds, with families distinguished according to the family size,
the farm/non-farm status, the number of children, and the gender of the family head. In 1981, the
number of thresholds was reduced to 48 (Fisher, 1992; U.S. Department of Health, Education, and
Welfare, 1976).
11
The conception of poverty only in economic terms has been challenged by many
observers, perhaps most notably Amartya Sen. While Sen (1973) himself developed
a well-known income-based index of poverty, he has argued strongly (1992) that this
class of metrics overlooks aspects of poverty that are essential to consider if it is to
be adequately addressed by policy.
2
Sen (1992) points to capabilities as a critical and
foundational component for any discussion of poverty: “the basic failure poverty
implies is one of having minimally adequate capabilities” (p. 111). Sen (1999)
divides poverty into two major components: income poverty and capability poverty,
arguing that improvement in capability enhances a person’s ability to be more
productive and earn a higher income.
Based on this notion of capability deficit, Sen and Anand (1994, 1997) developed
new poverty indices, known as the Human Poverty Indices (HPIs), which they argue
better capture the extent of poverty in an area than do other measures. These indices
incorporated factors beyond basic income level, including public health and literacy.
One such index for Organization for Economic Co-operation and Development
(OECD) countries takes the form of:
HPi-2 = [
1
/4 (P
1
α
+ P
2
α
+ P
3
α
+ P
4
α
)]
1/α
2
Sen (1973, 1997) developed a Poverty Measure S, which accounted for the “depth” and
“distribution” of poverty within a population, where S = H[ I + (1–I)G], where G is the Gini
Coefficient and H is the “Head Count Ratio.” For this, he postulated a term called “Income Gap
Ratio,” I = (z –μ
)/z, where z is the “poverty line” income and μ
is the mean income of the poor.
12
In this formulation, P
1
represents one’s probability at birth of not surviving to age
60; P
2
is the fraction of adults lacking functional literacy skills; P
3
is the proportion
of the population below the poverty line, defined as 50 percent of a nation’s median
household disposable income; and P
4
is the long-term unemployment rate. Long-
term unemployment is defined as an unemployment spell lasting 12 months or more,
and α is the order of weighted power mean at which HPI is calculated. To calculate
HPI-2, the optimum value of α is 3.
3
In 2005, the HPI-2 for the United States was
15.4, while the fraction of people below the poverty line was 17.0 percent. Compared
α to 17 other OECD countries, the U.S.’s HPI-2 ranking stood 17th, just above Italy
(United Nations Development Programme [UNDP], 2005).
4
This makes poverty in
the United States a matter of great concern.
Indeed, poverty, whether considered in terms of capabilities and income or in
terms of income alone, remains a significant problem for many groups in the United
States. In 2004, the U.S. Census Bureau reported that, in terms of individual poverty,
12.7 percent of the population, almost 37 million people, lived below the poverty
3
The generalized Human Poverty Index P
(α)
is the weighted power mean of the poverty subindices
P
1
, P
2
, P
3
, and P
4
provided by the equation:
P
) (α
= {
4 3 2 1
4 4 3 3 2
2
1 1
ω ω ω ω
ω ω ω ω
α α α α
+ + +
+ + + P P P P
}
α / 1
, ω
1
= ω
2
= ω
3
= ω
4
= 1
For calculating the Human Poverty Index, α = 3 has been chosen because it places great (but not
overwhelming) weight on those dimensions in which deprivation is larger. In contrast, if α = 1, the
impact on P
() α
for any unit increase (or decrease) of any subindex is the same, irrespective of the
level of deprivation in any other dimension. This contradicts the usual assumption that as the extent of
deprivation in any dimension increases, the weight on further additions to deprivation in that
dimension should also increase. If α ∏ 0, there is no substitutability between the subindices (UNDP,
1997).
4
The 18 selected OECD countries ranked by HPI-2 in the following descending order: Sweden,
Norway, Netherlands, Finland, Denmark, Germany, Switzerland, Luxembourg, Canada, France,
13
line (see Table 1, below). Poverty was highest amongst Blacks and Hispanics.
Families headed by single women had the highest incidence of poverty: 28.4 percent
of all female-headed households (nearly 4 million families) were poor (Institute of
Research on Poverty [IRP], 2005). Furthermore, the Census data show that poverty
in the United States has persisted among a large number of people over a long period
of time.
5
Although the emphasis of the present study is on capability poverty, use of
economic data on poverty to identify population groups impacted by poverty is
justified for at least two reasons. The first reason follows from Sen’s (1992)
argument that “relative deprivation in the space of incomes can yield absolute
deprivation in the space of capabilities” (p. 115). The second reason is that the
government poverty data based on income and expenses, at least as overall statistics,
present a national poverty landscape, which matches the reality of comparative
impoverishment on the ground. This is understandable because economic indicators
are also “social indicators” (Gross, 1966).
Spain, Japan, Belgium, Austria, United Kingdom, Ireland, United States, and Italy.
5
Between 1959 and 1969, the individual poverty rate in the United States was 12.1 percent. In 1971,
it was 12.5 percent. In 1973, it was 11.1 percent. At that time, roughly 23 million people were poor. In
1975, the poverty rate increased to 12.3 percent. It then oscillated around 11.5 percent for the next few
years. After 1978, it rose steadily to 15.2 percent in 1983. In 1993, it was 15.1 percent. It fell to 11.3
percent in 2000. The poverty rate has been rising since 2001, reaching 12.7 percent in 2004 (IRP,
2005).
14
Table 1:
Poverty Among Individuals by the Official Poverty Measure
Characteristics Number
(in millions)
Poverty Rate (Percent)
All Races (2004) 36.997 12.7
Whites, not Hispanic (2004) 16.870 8.6
Blacks (2004) 9.000 24.7
Hispanics (2004) 9.132 21.9
Asians (2004) 1.209 9.8
Within Metropolitan Areas (2003) 28.367 12.1
In Central Cities (2003) 14.551 17.5
Outside Central Cities Within
Metropolitan Areas (2003)
13.816 9.1
Outside Metropolitan Areas (2003) 7.495 14.2
SOURCE : Institute of Research on Poverty (2005) using Census Data.
Aside from capability issues, scholars have also pointed to the sociological
consequences of poverty, which, it is argued, increase the likelihood that those in
poverty remain in poverty. In this context, poverty is thought to inflict social and
psychological harm that perpetually haunts the poor. For example, Hurley (1969)
contends that a “culture of poverty” incapacitates the poor and limits their ability to
engage society, overcome challenges, and improve their economic standing.
Similarly, Cohen and Sullivan (1965) assert that poverty inhibits the “emotional,
intellectual, and social development” (p. 83) of the impoverished and constrains their
ability to achieve success.
While this broad perspective on poverty provides important insights, considering
all of these dimensions explicitly in terms of crafting policy is beyond the scope of
the present study. Rather, this research considers one aspect of this broad
dimensionality of poverty—capability deficit—and examines the extent to which
15
policies that foster innovational entrepreneurship can help to alleviate shortcomings
in this dimension that contribute to persistent poverty.
Poverty in America: The Who and the Why
In order to consider policy for poverty alleviation in America, it is necessary to
first identify who the impoverished are. This is important because different people
enter into and are affected by poverty in different ways. Understanding the nature of
this variation is critical to shaping solutions. Two main demographics of poverty,
urban and rural, have been the subjects of studies over the years. These studies
indicate that urban poverty and rural poverty have different characteristics, including
capability deficits (e.g., Duncan, 1999; Fetchen, 1981; Jargowsky, 1996; Massey &
Eggers, 1990; Weber & Jensen, 2004; Wilson, 1987, 1996). In other words, the
challenges facing the urban poor are quite different from those facing the rural poor.
First, the two groups have very different distributions of poverty (see Table 2,
below).
16
Table 2:
Urban and Rural Poverty Differences in the United States (2003)
Subject Urban
(Percent)
Rural
(Percent)
By Race
White (non-Hispanic) 7.3 11.3
Black (non-Hispanic) 23.4 30.5
Hispanic 22.2 25.4
Other 12.8 19.5
By Family Type
Husband & Wife 6.0 7.1
Male Headed 13.2 18.7
Female Headed 28.9 36.2
All Persons in Family 10.4 12.1
By Region
Northeast 11.2 12.0
Midwest 9.7 11.1
South 13.0 17.7
West 12.3 14.6
Total 12.1 14.2
SOURCE: Economic Research Service (ERS), 2004.
Second, the two groups have very different population densities. The urban group
is densely populated, whereas the rural group, which makes up 17 percent of the U.S.
population, is spread out over 80 percent of the nation’s land mass, making it
difficult to provide services to them in many areas (Health and Human Services,
2005a). Third, rural areas have fewer college graduates, fewer full-time employed
individuals, fewer individuals in management and professional occupations, and
lower earnings (USDA, 2003).
The Urban Poor
Of the nation’s 37 million poor, about 28 million, or 76 percent, of them live in
metropolitan areas (Table 1), defined by the Office of Management and Budget
17
(RUPRI 2004) as places with populations of 50,000 or more with a density of at least
1,000 persons per square mile. When considering the urban poor, it is useful to first
distinguish their specific location within a metropolitan area. The most common and
“prototypical” conception is that the urban poor live in or near the metropolitan
area’s central core. Many researchers have focused on this form of poverty,
including Wilson (1987, 1989, 1996), Jargowsky (1996), and Massey and Denton
(1988, 1989, 1993). There is thus a significant body of literature that has examined
the nature of poverty for this population, focusing particularly on the root causes of
the observed hardships, which include race, segregation, structural economic
changes, education, and an underclass mentality.
Race. Out of the 28 million urban poor, 7.12 million are black, 8.15 million are
Hispanic, and 11.02 million are White.
6
Significantly, there are neighborhoods that
are suffering from high and persistent poverty (40 percent or higher). Typically,
these are primarily minority neighborhoods that are located in or near the
metropolitan area’s “central core” (Jargowsky, 1996; Jargowsky & Bane, 1990).
Table 3, below, shows the distribution of high poverty neighborhoods in
metropolitan areas in 1990, the most recent data available in this format (high
poverty is defined here as a poverty rate of 40% or higher).
6
The population and poverty estimates by the ERS for 2003 are based on the March 2004
supplement by the U.S. Census Bureau (Jolliffe, 2006): total population for White non-Hispanics:
nonmetro: 43,054,560 (11.35% poor), metro: 151,540,090 (7.27% poor); total population for Black
non-Hispanics: nonmetro: 4,343,972 (30.51% poor), metro: 30,452,398 (23.44% poor); total
population for Hispanics: nonmetro: 3,586,967 (25.38 % poor) metro: 36,712,795 (22.17% poor);
total population for others: nonmetro: 1,966,153 (19.53% poor), metro: 16,042,246 (12.85% poor).
18
Table 3:
High Poverty Neighborhoods and Their Populations
Neighborhood
Group
Number
of High
Poverty
Tracts
White
Non-Hispanics
Black
Non-Hispanics
Hispanics
Total
Total 2,866 1,900,000 4,198,000 2,052,000 8,446,000
White Slums 387 50.4% 2.1% 2.3% 13.7%
Ghettos 1,329 11.1% 76.9% 5.5% 42.4%
Barrios 334 5.0% 2.3% 60.0% 17.1%
Mixed Slums 816 33.6% 18.7% 32.2% 26.9%
SOURCE: Jargowsky (1996).
NOTE: Totals include other races not shown separately. Percentages may not add up to 100 due to
rounding. White slums are census tracts in which the population is at least two-thirds White; ghettos
are at least two-thirds Black; barrios are at least two-thirds Hispanic. All other tracts are mixed slums.
Table 3 confirms that the most common high-poverty neighborhoods are
predominantly black, as they account for about half of them and about 43 percent of
their residents. The next largest neighborhood group, mixed slums, has no dominant
race, and there are approximately the same number of White slums and barrios.
Table 3 also reveals that, within high-poverty neighborhoods, half of the non-
Hispanic Whites live outside predominantly White neighborhoods, and 40 percent of
the Hispanics live outside predominantly Hispanic neighborhoods, but less than 25
percent of the blacks live outside predominantly black neighborhoods. One may
conclude, then, that the White and Hispanic poor are more dispersed among and less
isolated from the general population than are the black poor. Furthermore, by
interpreting 1990 census data, Jargowsky (1996) found that nationally “more than
two-thirds of the White poor actually lived in low-poverty areas,” and “in contrast
one-fourth of the black poor and one-third of the Hispanic poor lived in low-poverty
neighborhoods” (p. 72). Several social and economic phenomena explain the linkage
19
between the spatial organization of people and the concentration of poverty. This
linkage offers an explanation for the historical perpetuation of poverty in certain
communities.
Segregation. Massey and Denton (1993) found that segregation is the key factor
in perpetuating persistent and spatially concentrated poverty. Cutler and Glaeser
(1996) showed that “outcomes for blacks are worse in cities where blacks are more
segregated from Whites” (p. 1). The body of literature also supports the notion that
blacks have suffered the most discrimination of any racial group, and the ensuing
segregation and isolation have left permanent emotional scars (e.g., Cutler &
Glaeser, 1996; Wacquant & Wilson, 1989; Wilson, 1987, 1996). It is critical,
therefore, to acknowledge that the isolation of black neighborhoods should play a
central role in any discussion of segregation and poverty.
To emphasize how important Black poverty is in the U.S. poverty paradigm,
Jargowsky (1996) postulates that “without black poverty, there would be no
concentration of poverty problem” (p. 141). This is not to say that Hispanics and
other minorities have not suffered segregation, but its consequences have been less
severe for them, since their ethnic bonds and horizontal solidarity have made it easier
for them to survive the impact (Light, 1972; Portes, 1995). For example, until the
period after the Second World War, the Chinese and the Japanese were subjected to
extreme segregation in the United States, but they continued to prosper even in their
isolated enclaves (Light, 1972).
20
Segregation can be residential, economic, or both. In their study of black
segregation, Massey and Denton (1993) found that residential segregation keeps
blacks from job networks and developing human capital, which results in economic
segregation as well. Cutler, Vigdor, and Glaeser (1997) studied black segregation
between 1980 and 1990, and found that it had both voluntary and forced
components. It was voluntary when the blacks preferred to live near members of
their own ethnicity, and it was forced on them when Whites imposed racial barriers
either through legal means or economic ones, such as by charging high rents. In any
case, voluntary segregation is not exactly freedom (Sen, 1992).
As proof of how segregation impairs human performance, Boger and Wegner
(1996) cited several quantitative studies. For example, Massey, Gross, and Eggers
(1991) found that racial segregation increases the probability of a black person not
being able to find work by 30 percent. Furthermore, the probability that a young
black woman will head a single-parent family is increased by as much as 43 percent.
Galster and Keeney (1998) found that if segregation is reduced by 50 percent, the
median income of black families would rise by 24 percent. Peterson and Krivo
(1993) found that if segregation is reduced by 50 percent, the black homicide rate
would fall by 30 percent. Galster (1991) found that if segregation is reduced by 50
percent, the dropout among black high school students would fall by more than 75
percent. And Price and Mills (1985) found that if segregation is reduced by 50
percent, the poverty rate of black families should drop by 17 percent.
21
Structural Economic Changes. Wilson (1987, 1996) highlighted
transformational economic changes taking place in the cities which he argues
contributed to the growth of urban ghettos. The first change was the structural shift
in the American economy from manufacturing to technology-intensive service
sectors. The second change was the relocation of the remaining manufacturing jobs
from the inner cities to the suburbs. Relying on Kasarda (1988, 1989), Wilson argued
that these phenomena adversely affected the employment of minority workers, who
mostly lived in the inner cities and had been making a decent living from low-skilled
manufacturing jobs.
Jargowsky (1996) divided Wilson’s theory into three hypotheses: ghetto poverty
is caused by (1) deindustrialization, (2) employment deconcentration, and
(3) occupational bifurcation.
7
As for deindustrialization, Jargowsky cited Bound and
Holzer (1993) and Eggers and Massey (1991), who determined that it only had a
minor impact on the metropolitan poverty rates of blacks and Hispanics. As for
employment deconcentration, Jargowsky cited numerous studies that found that it
had a marginally significant impact on the metropolitan poverty rates of blacks and
Hispanics (e.g., Holzer, 1991; Hughes, 1989; Jencks & Mayer, 1990l; Popkin,
Rosenbaum, & Meaden, 1993; Price & Mills, 1985; Rosenbaum & Popkin, 1991;
Rosenbaum, 1995). As for occupational bifurcation, Jargowsky used data from Levy
7
Jargowsky (1996) defines deindustrialization as “a decrease in the share of metropolitan jobs in the
gmanufacturing center”, employment deconcentration as “a decrease in the share of all jobs located in
the central city versus the suburban ring”, occupational bifurcation as “changes in the production
technology in all sectors that result in fewer middle-income jobs” (p. 118).
22
(1987) to conclude that it was real and may have contributed to increased urban
neighborhood poverty.
Another economic transformational change affecting black neighborhood
poverty, according to Wilson (1996), is the flight of the black middle class from poor
neighborhoods. Jargowsky (1996) supported this argument, based on the “prima
facie evidence that it is the spatial organization of people, and not just overall
poverty rates, that affects levels of neighborhood poverty” (p. 132).
Kelso (1994), on the other hand, was highly critical of what he called Wilson’s
“social isolation thesis.” He associated black ghettos with a black underclass, arguing
that the problem with the black underclass is that it “has adopted an exaggerated
version of” of what he called “society’s emancipated and often anomic culture”
(p. 173). Kelso believed that no minority community has been as helpless as the
blacks have been in extricating themselves from poverty.
Lack of Education. There is ample data to show that schools in poor inner-city
neighborhoods are overcrowded and ineffective due to a lack of resources and
infrastructures. Moreover, high unemployment and poor economic attainment in
adults provide little motivation to young people to pursue education (Jargowsky,
1996). Segregation keeps poor children from experiencing role models that are
available in non-poor families, and this lack of opportunity for building self-efficacy
limits the educational achievement of poor children from African American and
Hispanic families (e.g., Boger & Wegner, 1996; Jargowsky, 1996; Jencks & Mayer,
23
1990). As a result, educational attainment in poor neighborhoods is far lower than in
non-poor neighborhoods (see Table 4, below).
Table 4:
Educational Attainment of Adults, by Neighborhood Poverty Level, 1990
Educational
Attainment
Neighborhood Poverty Level
At the
Poverty Line
20% Below
the Poverty Line
40% Below
the Poverty Line
High School
Dropout
19.2% 40.7% 51.7%
High School
Graduate
29.1% 27.3% 23.9%
Some College
20.4% 15.6% 12.7%
Two-Year Degree
6.8% 4.6% 3.4%
Four-Year Degree
15.8% 7.5% 5.0%
Graduate or
Professional Degree
8.8% 4.3% 3.2%
SOURCE: Jargowsky (1996).
NOTES: Table includes adults age 25 and older. Percentages may not add up to 100 because of
rounding.
The Underclass Mentality: Drugs, Violence, and Teenage Pregnancy. The
psychological impact of persistent poverty in a community is an important part of
this dissertation’s thesis. Although many ghetto families accept the mainstream
American value of hard work (Anderson, 1989; Jargowsky, 1996; Wacquant &
Wilson, 1989; Wilson, 1987, 1996), we cannot overlook the existence of a
pathological counterculture, especially among the youth in these communities. This
underclass mentality may turn out to be the main stumbling block in any effort to
eradicate poverty from these communities. Wilson and others have tried to explain
the reasons underlying how this underclass phenomenon has evolved. They argue
24
that economic transformational changes and extreme discrimination have led to
concentration of impoverished blacks in poor inner-city neighborhoods.
To make matters worse, crack, a cheap, highly addictive, and smokable form of
cocaine, was heavily marketed by dealers in poor neighborhoods, and its use among
non-Whites, especially blacks, became widespread by the 1990s. Then the drug
dealers brought in guns and violence (Wilson, 1996). Lack of self-sustaining jobs
denied feelings of manhood among young black men, who then, influenced by
powerful peer pressures, turned to sexual prowess as a proof of their manhood. At
the same time, young black women sought to acquire some kind of status by having
babies. This resulted in disproportionate numbers of teen pregnancies and unwed
mothers (Anderson, 1989; Portes, 1995).
The Suburban Poor
Aside from poverty at or near the central core of cities, there is a growing
population of poor who live outside the central core, in the suburbs but still within
the metropolitan areas. Hispanics and blacks are moving to these areas in search of
low-skill jobs as the availability of transportation and low-income housing increases.
As a result, suburban poverty rates are rising. The 2003 poverty level of the suburbs
was 9.1 percent (see Table 1, above), compared to the 2000 poverty level of 8.4
percent (see Table 5, below). Although the poverty levels in the suburbs are
increasing, the suburban poor are distinct in some important ways from the poor in
the central cores of the metropolitan areas, especially in terms of poverty
25
concentration and the resulting impoverishment. The population mix of the suburban
areas is also different, since minorities are more dispersed in the suburbs than they
are in the central cores (see Table 5, below), a sign of less economic and social
isolation.
Table 5:
Population and Poverty Characteristics of the Central Core of the Metropolitan
Areas Versus Areas Outside the Central Core But Within the Metropolitan
Areas
Subject Inside the Central Core Outside the Central Core
Population Based on Ethnicity
White 51.0% 74.8%
Black 21.6% 8.2%
Hispanic 19.3% 11.2%
Economic Characteristic
Poverty 17.6% 8.4%
SOURCE: U.S. Census Bureau (2000).
The Rural Poor
Although the rural population comprises only 17 percent of the total population
of the United States, poverty for this group is nevertheless a problem. In 2003, 7.5
million people in rural America had income below the federal poverty line. Blacks
and Hispanics are the most affected communities, with poverty rates even higher
than they have in the urban areas (see Table 1, above). The United States has 386
persistently poor counties, of which 340 are rural, with 280 in the South and 60 in
the West and Midwest. Persistently poor counties are defined as those in which 20
percent or more of the population have been poor for the last thirty years (Economic
Research Service, 2003).
26
Compared to the literature on urban poverty, the literature on rural poverty is
relatively small. Working papers from the Rural Poverty Research Institute and
publications from the Economic Research Service are important sources of
information on rural poverty.
Rural poverty is different from urban poverty in several ways: (1) the rural
poverty rate is almost 4 percentage points higher than the urban rate; (2) a smaller
percentage of the rural workforce has full-time employment; (3) rural areas have
fewer professional and management jobs and lower educational attainment levels
than those found in urban areas (United States Department of Agriculture 2003).
Furthermore, nearly 40 percent of rural counties have no form of public
transportation (United States Department of Health and Human Services, 2005a).
Another factor affecting the rural poor is the social norms that prevail in these
communities. Rural family structures are more traditional and closely woven than
those among urban families, whose members are exposed to more diverse
circumstances and more opportunities for mobility. The close rural family
environments provide safety nets for family members, but they also increase the
likelihood that there will be more poor relatives, since reciprocity can unduly strain
families and prevent them from accumulating wealth (Flora, 2004). Furthermore, an
age-old hostile political environment of discriminatory practices by the White elite
has become a social norm, which helps to maintain the status quo of the class-based
society (Duncan, 1999). This explains why the South has the highest and most
27
persistent poverty rates in the country.
8
This does not mean that the urban politicians
are busy facilitating change in the neighborhood poverty equation. As the status quo
indicates, they clearly are not. However, Duncan’s (1999) research suggests that the
White elite’s dominance in the rural areas is more blatant than in the cities, and the
silence of the poor is more evident, most likely because of the race-based power
imbalance inherited from the days of slavery.
Researchers have concluded that there is something about rural poverty that
cannot be explained in simple terms (see Table 6, below). They call this phenomenon
the “rural effect”, which Weber and Jension (2004), after review of 15 years of
research, explain as below:
Two people with identical racial, age, gender, and educational
characteristics in households with the same number of adults and
children and workers have different odds of being poor if one lives in
a rural area and the other lives in an urban area. The one living in the
rural area is more likely to be poor. ( pp. 19–20)
8
To demonstrate how extreme poverty is in the South, Duncan (1999) describes the condition of
housing in the town of Dahlia, in the Mississippi Delta, as a “cluster of old tenant shacks on a dirt
road near Baker’s plantation store and gas station. The shacks’ corrugated tin roofs are patched with
old pieces of metal, and their siding is a collection of different sized wood nailed roughly to the
leaning structure” (p. 73).
28
Table 6:
The Odds of Non-Metropolitan Residents Being in Poverty
Population Authors/Dates Odds Ratio
Relative to metro
All Households Cotter (2002) 1.19
Relative to metro core Non-Elderly Households Brown &
Hirschi (1995)
2.27
Relative to fringe metro Non-Elderly Households Brown &
Hirschi (1995)
2.70
Relative to other metro Non-Elderly Households Brown &
Hirschi (1995)
1.42
Relative to urban Labor
Market Area (LMA)
Non-Elderly Married
Women and Men
Haynie &
Gorman (1999)
1.43
SOURCE: Weber & Jenson (2004).
Closing Remarks
One of the essential points made in this chapter is that millions of people in the
United States are entrenched in persistent poverty over a number of years, unable to
rise above this scourge. Distraught and overwhelmed, the poor in this country live in
dysfunctional environments, unable to exert any semblance of control over their lives
or the lives of their children, who are turning to crime and instant gratification to
prove that they, too, are somebody.
The evidence places blacks in forefront of the poverty landscape. Whether it is in
the cities or in urban areas, the black poverty is the most concentrated and extreme
and it has persisted over several decades. In America the poor black communities
have remained the most segregated and isolated both socially and economically
which has impacted their abilities to overcome poverty. It is further complicated by
the fact that being persistently poor in a society that has plentiful, causes desperation,
especially among the youth, to catch up even through illegal means.
For that reason, the issue of capability enhancement has become a central thesis
29
of this study since the evidence supports Amartya Sen’s (1973, 1992, 1997, 1999)
notion that poverty is comprised of both economic and capability deficits, and that
the capability issue is the most critical part of the equation.
30
Chapter 2:
Federal Programs to Alleviate Poverty
Before arriving at a policy recommendation for alleviating poverty in the
American context, it is important to review the existing government programs that
address this issue. The federal, state, and local governments spend billions of dollars
on welfare, low-income housing. and private sector and non-profit activities
associated with providing relief to the poor. This chapter will discuss the main
government programs, which are mostly funded by the federal government, their
evolution, and their impact on poverty.
Historical Review
The federal government’s intervention in alleviating economic hardship has a
long history in the United States. President Franklin Roosevelt, when elected in
1932, initiated the “New Deal” in order to alleviate people’s suffering during the
Great Depression and stimulate economic recovery. The New Deal included many
programs, among them the Social Security Act (SSA), U.S. Housing Act, Federal
Relief Emergency Administration (FERA), Civil Works Administration (CWA),
Works Progress Administration (WPA), Tennessee Value Authority (TVA). These
programs helped millions of Americans to escape poverty and destitution.
9
9
The Social Security Act (SSA) provided old-age pensions to workers and benefits to dependent
mothers, children, the blind, and the physically disabled. Although the original SSA did not cover
31
Roosevelt also took steps to revitalize industrial activity in the country, and this
effort continued with the administrations that followed his. President Truman, faced
with opposition by the Republican Congress to his social and civil rights programs,
issued Executive Orders desegregating the armed forces and forbidding
discrimination Federal employment (Truman Library, 2007. ¶ 10) President
Eisenhower, with the passage of the Small Business Act of 1953, created the Small
Business Administration (SBA) for the express purpose of expanding commercial
ownership and entrepreneurial capabilities in the economically depressed sections of
the population.
The government’s efforts regarding poverty became more pronounced and more
public after the election of John F. Kennedy in 1960. During his presidency,
Congress approved a minimum wage increase and higher Social Security benefits.
The Area Redevelopment Act of 1961 (ARA) and the Manpower Development and
Training Act of 1962 (MDTA) gave the Department of Labor (DOL) a role in
addressing the widespread concern that automation would eliminate low-skilled jobs.
Under the ARA, the Department provided retraining for workers in areas of high
unemployment, such as Appalachian. The MDTA was a much broader law that grew
into “a large and complex employment and training program” (U.S. Department of
farm and domestic workers, it did help millions of Americans. The Federal Emergency Relief
Administration (FERA) put people to work instead of doling out charity. It funded public works
programs and revitalized deteriorating relief programs, such as slum clearance and urban
rehabilitation. The Civil Works Administration (CWA) provided a physical and psychological boost
to 4 million workers by providing jobs to build or repair roads, parks, and airports. The Works
Progress Administration (WPA) provided jobs to 8 million Americans to construct schools, hospitals,
and airfields. The Tennessee Valley Authority (TVA) reactivated hydroelectric power plants and
created jobs in one of America’s least modernized areas (U-S-History.com, 2000).
32
Labor, 2004, ¶ 6). The MDTA has evolved over the years from a program to train the
unemployed and disadvantaged for any job and income to a vehicle for helping
welfare recipients to transition into the workforce through training, job search, and
education.
President Johnson took poverty initiatives to a higher level through his War on
Poverty. He was very successful legislatively, the prime examples being the Equal
Opportunity Act of 1964, the Voting Rights Act of 1965, the Housing and Urban
Development Act of 1965, the Elementary and Secondary Education Act of 1965 and
the Medicaid which was created in 1965 through title XIX of the Social Security Act.
Over and above these legislative actions, more than a thousand community initiatives
were launched during Johnson’s presidency (see Table 7, below). However, these
actions, which symbolized the overarching concept of the “Great Society,” were not
without their critics, including Milton Friedman and Thomas Sowell. Moreover, as
Wilson (1996) notes, there are those in the U.S. Congress and elsewhere in the
government who believe that in a capitalist economy unemployment and poverty
cannot and should not be eliminated, which will always leave some non-performing
people who will be poor. Libertarians have also questioned Johnson’s views on
poverty and his other programs. For example, Adam Young (2002) described
Johnson’s programs as obstacles for the able-bodied and able-minded to produce and
trade. Such criticism notwithstanding, the above legislative actions remain major
milestones in American efforts to alleviate poverty.
33
Table 7:
Some of the Community Action Initiatives Started by President Johnson
Initiative Description
Project Head Start Designed to increase the school readiness of low-income children
between birth and age 5.
Job Corps Provides education and job training to high-school dropouts
between the ages of 16 and 21.
Neighborhood Youth
Corps
Helps to provide employment, job counseling, and remedial
education to youth between the ages of 16 and 21.
Adult Basic Education Designed to give illiterate and undereducated adults sufficient
instruction in reading, writing, and arithmetic to qualify them for
the workforce.
Work-experience Program Designed to give unemployed parents vocational instruction and
on-the-job training, as well as basic education and personal
counseling.
Volunteers in Service to
America
Recruits volunteers to work at least one year in urban slums, Indian
reservations, and mental institutions.
Upward Bound Designed to motivate students from low-income families to go to
college.
Work Incentive Program
(WIN)
Helps able-bodied persons to get off welfare rolls and onto payrolls
by providing training and work experience and finding jobs.
SOURCE: Chrest (2005).
The Key Programs: Their Successes and Failures
The federal government has retained a multi-pronged approach to poverty and
economic development. There are seven federal agencies involved in current
government efforts.
10
The programs serve four different overall objectives: (1) job
10
The agencies are: the Department of Labor (DOL), the Department of Health and Human Services
(DHHS), the Social Security Administration (SSA), the Department of Housing and Urban
Development (HUD), the Economic Development Administration (EDA) in the U.S. Department of
Commerce, the Small Business Administration (SBA), and the Department of Agriculture (USDA).
The DOL manages job training, placement, education, and youth development. The SSA provides
retirement benefits, unemployment insurance, and financial assistance to the old, disabled, and
children. The HHS manages subsistence income and support, including Medicaid. The HUD manages
the Neighborhood Development Programs, the Federal Housing Assistance (FHA), and Community
Renewal Tax Credit Program. The EDA helps distressed communities with economic development
34
training, education, and youth development; (2) provision of subsistence income and
health care; (3) neighborhood development and low-income housing; and
(4) assistance to small businesses in low-income and disadvantaged communities
(see Figure 1, below).
Figure 1: A Multipronged Approach of the Government for Poverty
Job Training and Youth Development Programs
Job training, in the words of O’Leary, Straits, and Wandner (2004), is “teaching
aid. The SBA assists small business financing. The USDA administers the Food Stamp program.
35
someone the skills required to do a job completely” (p. 2). It is distinct from general
education because of its focus on preparedness for a particular employment. The
training could be remedial or occupation-specific and is generally provided in a
group setting. It may also be offered in a customized format in response to specific
requests from employers, as in the On-the-Job-Training (OJT) program, or possibly
through vouchers on approved topics on the initiative of participants and training
providers. Youth Development Programs involve training for basic workplace skills
or to support general education, mentoring, school-to-work, school-to-
apprenticeship, residential education, or occupational or job training (O’Leary et al.,
2004).
In the year 2001 the investment of the Federal government in job training was
$6.4 billion, that is 0.04 percent of GDP (making it 23rd in a list of OECD
countries), compared to Denmark’s 0.84 percent (placing it first on the list), in dollar
terms ($6.4 billion) (O’Leary et al., 2004). Interest in augmenting the skills of the
workforce through the public sector programs began as far back as 1958, when the
Area Development Act was passed. It was succeeded by the Manpower
Development and Training Act of 1962. With the passage of the Economic
Opportunity Act of 1964, the emphasis changed from simply assisting with securing
jobs to reducing poverty, and the program money began to serve welfare recipients
and low-income youth. The exception is the Job Corps program, which has remained
active.
11
11
Currently, the Job Corps offers career training to eligible youth between the ages of 16 and 24 in
36
In 1973, during the Nixon Administration, MDTA was replaced by the
Comprehensive Employment and Training Act (CETA), which introduced the
concept of revenue sharing with the states, giving them much say in the
administration of the program. In 1982, during the Reagan Administration, CETA
was replaced by the Joint Training Partnership Act (JTPA), which authorized
funding services for unemployed dislocated workers who were not economically
disadvantaged. According to LaLonde (1995), the 1982 Act “reinforced its
predecessor’s decentralized structure, eliminated its public service employment
structure, and, with exception of the Job Corps, substantially reduced expenditure on
traditional services for the economically disadvantaged” (p. 151). In Palmer’s (1987)
view, the 1982 Act was a “conservative challenge on the principles, policies, and
programs of liberal tradition of federal activism in economic and social affairs as it
evolved in the half of the century starting with the New Deal” (p. 9).
The Workforce Investment Act (WIA) of 1998, signed by President Clinton,
continued the employer-focused approach for training through one-stop career
centers and less intensive training. The Act also introduced performance
accountability indicators for the training centers (LaLonde, 1995; O’Leary et al.,
2004). President Clinton also started the Early Head Start Program in 1995 to
more than 100 occupational areas, including business technology, health, hospitality, culinary arts,
construction, and auto repair. Students also receive academic training, including basic reading and
math, GED attainment, college preparatory courses, and Limited English Proficiency. Employability
skills, social skills, and courses in independent living are offered in order to help students transition
into the workplace. The Job Corps also offers career planning, on-the-job training, job placement,
residential housing, food service, driver’s education, health and dental care, a bi-weekly basic living
allowance, and a clothing allowance. In 2006, this program helped 62,000 students (U.S. Department
of Labor, 2007).
37
enhance the cognitive and social development of children from birth to three years of
age through “the provision of educational, health, nutritional, social and other
services to enrolled children and families” (U.S. Department of Health and Human
Services, 2007).
Researchers have attempted to analyze the maze of data on the trainee
populations in all these programs, especially in relation to their earnings and job
retention rates. The conclusions, however, vary widely, ranging from significant
earnings gains to negative earnings, particularly for the older programs such as
CETA, in which the training was not carefully planned to take into account the labor
market and economic trends or employers’ needs. Sawhney, Jantzen, and Herrnstadt
(1982) found only moderate earning gains from CETA programs (from $2.64 per
hour to $3.33). In terms of job retention, 80.7 percents of CETA training graduates
were still employed 8 months after training. Grubb (1995) discovered, by analyzing
CETA’s data for the 1970s, that trainees’ income after the program only rose
between $200 and $300 per year. Grubb (1996) advocated integrating education into
the vocational training to obtain better results.
LaLonde (1995) found by analyzing several studies that MDTA and CETA
programs showed constant gains in the income of disadvantaged women (between
$1,000 and $2,000 per year). His analysis further indicated that the MDTA and
CETA had little impact on the incomes of disadvantaged men and youth, depending
on the individual study the increase in earning unexplainably varied from 750 dollars
per year to a negative 870 dollars per year. In contrast, LaLonde found that AFDC
38
recipients with a long history of being on welfare and only 12 months of work
experience increased their annual earnings by $1,760. Much of the data has little
consistency.
A review of the outcomes of JTPA training participants for the year 1999
indicates that the employment rate for adults in the program increased by 68.00
percent, for youths by 47.00 percent, and for dislocated persons by 69.00 percent.
The earnings of these three groups increased by 8.75, 7.07, and 11.45 percent,
respectively (O’Leary et al., 2004).
Close to 1995 JTPA under Title IIA and Job Corps provided services to nearly
900,000 economically disadvantaged persons annually. The Job Corpse, which has
remained unchanged over years, served 40,600 persons in 1966, served 104,000
persons annually in the mid 1990s (Lalonde, 1995). Lalonde (1965) also reports a
cost benefit analysis of the Job Corpse Program which includes the estimated savings
from social benefits such as reduced criminal activity and shows a net social benefit
per participant of $5,500 with the training cost of $12,170 per person. Most
contributors on this topic acknowledge the social benefits from the Job Corpse.
In 2002, Head Start increased the mean standard score for children’s vocabulary
from 85.3 to 89.1, and the mean standard score for their writing from 85.1 to 87.1,
while at the same time increasing their cooperative behavior and reducing their
hyperactive behavior (Lyon, 2003).
The Job Training Program although meager in view of the size of the problem
has at least marginal positive impact on earnings. It is apparent, however, that if the
39
training is focused on labor market trends and if possible made employer-specific, a
brief training can yield better results in terms of earnings and job retention. The other
problem that needs to be addressed is that the direction of the program is in the hands
of multiple agencies that all have their own vested interests making data reporting
fragmented and difficult to analyze.
Reduction in poverty is a different issue. There is little evidence that this
program can make a dent in the poverty level, mostly because the gains are small, the
sustainability of higher earnings is labor-market-dependent and questionable, and the
training is mostly vocational, ignoring initiative and creativity.
Health-Care and Subsistence Income Programs
Created on July 30, 1965, through Title XIX of the Social Security Act, Medicaid
is the largest health-care program in the nation for low-income families.
Administered by the U.S. Department of Health and Human Services (USDHHS),
the program is jointly funded by federal and state governments. The states have their
own names for the program, such as Medi-Cal in California, MassHealth in
Massachusetts, and TennCare in Tennessee. The states may also bundle within
Medicaid other programs such as the state Children’s Health Insurance program
(SCHIP). In 2001, more than 46 million people were enrolled in this program
(USDHHS, 2005B).
Medicaid is a lifeline for the health management of the poor, but many states are
turning it into a managed care program (Brown, 1983) due to the soaring costs of
40
medical care (Stuart & Weinrich, 1998), especially since the beginning of the AIDS
epidemic (Wade & Berg, 1995).
Medicaid spending rose from $25 billion in 1980 to $278.3 billion in 2004. By
1994, the states’ spending on Medicaid accounted for an average of 20 percent of
their budgets. By 1996, 40 percent of the Medicaid beneficiaries were enrolled in
managed care programs. Nevertheless, there is evidence that these programs are not
saving money (Stuart & Weinrich 1998). Furthermore, the managed care approach
has made many medical practitioners opt out of the program. As a result, Medicaid
patients find it difficult to obtain regular care from a physician and mostly have to
depend instead on hospital services. Individuals who are eligible for Medicaid
include pregnant women, minors, the elderly, the blind, and the disabled (Stuart &
Weinrich 1998)
The Department of Health and Human Services also administers the Aid to
Families with Dependent Children (AFDC) program and the Temporary Assistance
for Needy Families (TANF) program. AFDC was established by the Social Security
Act of 1935 as a grant program to enable states to provide cash assistance to needy
children who were deprived of parental support. The Personal Responsibility and
Work Opportunity Reconciliation Act (PRWORA) of 1996 replaced AFDC with
TANF. The latter program limits assistance to five years with a requirement for
increasing work participation.
Critics of the welfare reforms made in 1996, such as Larner, Terman, and
Behrman (1997) and Howard (1999), claim that there is too much emphasis on work,
41
and that children’s benefits are reduced based on the work performance of their
mothers. The critics also claim that, under the new rules, states have too much power
to structure these programs, and that many of the states have chipped away the
benefits based on their politics and budgetary constraints. Supporters of the reforms,
such as Nightingale and Holcomb (1997) and Blank and Haskins (2001), cite data to
show that the welfare rolls have been reduced and that the number of welfare
recipients who are working has increased.
However, simple caseload reduction may not be sufficient evidence of the
reforms’ success. Boushey (2001) told the House Committee on Education and
Workforce that a detailed evaluation of the program would present a disturbing
scenario. On the one hand, welfare caseloads have dropped from 5.5 percent of the
U.S. population in 1994 to 2.1 percent in 2000, and poverty among children fell
between 1993 and 1999. On the other hand, these numbers shroud disturbing
realities. Many former welfare recipients are not working full-time or throughout the
year. They earn from $6.00 to $8.00 per hour, and are unable to cross the poverty
line (ACF, 2000; Acs & Loprest, 2001; Brauner & Loprest, 1999; Freedman et al.,
2000). Furthermore, researchers have found that PRWORA was implemented during
an economic boom, so that between 40 and 80 percent of the fall in caseloads may be
attributable to the boom and not to the policy reform (Council of Economic
Advisors, 1998; Wallace & Blank, 1998; Zillak, Figlio, Davis, & Connally, 1997).
The U.S. Department of Agriculture administers the Food Stamp Program, which
is the nation’s largest nutrition program for low-income Americans. In 2004, the
42
program served 24 million people each month, with an average monthly benefit of
$86 per month and a total outlay of approximately $27 billion. The size of the
benefits varies by household size. In 2006, the maximum allotment for a family of
four was $506 per month. To qualify for assistance, a household’s gross monthly
income must be less than 130 percent of the federal poverty guidelines (USDA
2005).
The U.S. Social Security Program is the largest social program in the world. In
2004, it paid out $493 billion in benefits to 48 million beneficiaries (Board of
Trustees of the Federal Old-Age and Survivors’ Insurance Trust Funds, 2005). It
consists of two main components. One is the retirement insurance component, which
provides cash benefits based on an indexed average income over a period of 35 years
to workers 62 or older and their spouses who have paid into the system through
payroll taxes. It includes benefits to widows and minor children after the death of the
main beneficiary. The second component is the social benefits to the disabled and the
blind regardless of age, based on their income history.
Medicare is a government health insurance program that covers people who are
65 and older, or who meet special criteria. The benefits divide into four categories:
Part A (Hospital Insurance), Part B (Medical Insurance), Part C (Medical Advantage
Plan), and Part D (Prescription Drug Plan). Part A comes with the Social Security
award. Additional premiums for Part B and D, which are optional, are collected from
the Social Security payments. Part C, which was instituted in 1997, gives Medicare
beneficiaries the option to obtain Part D benefits through private insurance plans. In
43
2005, Medicare covered 42.5 million people, 35.8 million of who were aged 65 and
older and 6.7 million of whom were disabled. The total benefits paid in 2005 were
$330 billion (Board of Trustees of the Federal Hospital Insurance Trust Funds 2006).
Low-Income Housing and Neighborhood Development Programs
Low-income housing programs subsidize housing costs for the poor. Since their
initiation in 1937 with the passage of the U.S. Housing Act, a multifaceted system of
housing subsidies has evolved, some of which are listed in Table 8 below. Although
the U.S. Department of Housing and Urban Development (HUD) funds most of the
programs, the U.S. Department of Agriculture (USDA) accounts for more than 20
percent of all subsidized housing units (Olsen, 2001).
44
Table 8:
System of Housing Programs
Year Program Title and Description
1937 Public Housing, publicly owned
1949 S502, USDA, home ownership
1954 S221(d)(3), MIR, HUD, rental, privately owned
1959 S202, HUD, rental, privately owned, elderly and handicapped
1961 S221(d)(3), BMIR, HUD, rental, privately owned
1962 S515, USDA, rental, privately owned
1965 Rent supplements, HUD, rental, extra subsidy to private projects
1965 S23, HUD, rental, leasing existing units for public housing tenants
1968 S235, HUD, home ownership
1968 S236, HUD, rental, privately owned
1969 Modernization subsidies for public housing
1969 Rents in public housing limited to 25% of income
1970 Substantial operating subsidies for public housing
1974 S8 Existing, HUD, rental, tenant-based
1974 S8 New Construction/Substantial Rehab, HUD, rental, privately owned
1975 Operating subsidies for public housing (Performance Funding System)
1976 Operating subsidies for privately owned projects (MSA & PD)
1979 Modernization subsidies for privately owned projects
1983 Housing Voucher Demonstration, HUD, rental, tenant-based
1986 Low-Income Housing Tax Credit, IRS, rental
1990 HOME, HUD, rental and home ownership, block grants to states and localities
1998 New Voucher Program, HUD, rental, tenant-based
SOURCE: Olsen (2001).
This complex system includes direct government investments, low-income
housing tax credits (about $3 billion per year), local property tax exemptions and
abatements, and federal income tax exemptions for interest on bonds and
underpriced mortgage insurance. In totality, the system is bigger than welfare
programs such TANF and Food Stamps (Olsen, 2001).
The government has adopted three basic approaches for delivering housing
assistance: (1) it owns and operates new housing; (2) it contracts with private parties
to build or rehabilitate and operate housing; and (3) it subsidizes housing costs to
45
eligible households that select housing in the private market with certain quality
standards. In 1997, HUD assisted approximately 5.1 million households with rent
and 631,000 households with home ownership (Olsen, 2001). However, the number
of subsidized houses under HUD ownership, USDA home ownership, and other
small programs exceeds 2.5 million (Olsen, 2001).
Nevertheless, using evidence gleaned from several quantitative studies and from
government data, Olsen (2001) argued that the low-income housing system suffers
from several management and structural deficiencies. First of all, he contended, the
overwhelming majority of eligible households do not receive housing assistance,
which could have been avoided by more efficient utilization of funds. Olsen cites
data from HUD and the Department of Commerce to show that 43 percent of
households served by HUD’s programs are above the poverty line, and 70 percent of
renters below the poverty line are not served (Olsen 2001, p. 19). Second, occupants
of public housing use more housing services than they would if they were given
equivalent cash grants. Third, public housing neighborhoods have more households
below the poverty line than do neighborhoods occupied by recipients of certificates
and vouchers. Fourth, black housing program participants live in neighborhoods with
significantly higher percentages of minority. Fifth, all major housing programs, well
before they reach the midpoint of their useful lives, provide less desirable housing
than does the housing occupied by voucher recipients. Finally, a shift from project-
based assistance to tenant-based vouchers and certificates would enable several
million more households to receive assistance without any additional expenditure.
46
The Federal Housing Administration (FHA) mortgage insurance program is
crucial for low-income households to acquire home ownership with relatively few
resources. This program underwrites home loans for approved lenders at more liberal
terms than does regular real estate home lending. It allows for a minimal down
payment and partially financed closing costs. It also finances repair costs on
rundown housing at the time of purchase and before the owners move in (FHA,
2007).
Home ownership can be a steppingstone for the poor to rise above poverty.
Recognizing the importance of the FHA program for low-income persons, Green
(2001) cited several studies that found positive personal and social outcomes
emanating from home ownership. For example, Henderson and Joannides (1983)
found that property owners generate a better physical environment than do tenants,
and O’Sullivan (1993) found their neighborhoods have lower crime rates. Glaeser
(1999) and Rossi and Weber (1996) found that homeowners tend to be active citizens
in their communities, or what Fine (1999) calls generators of “social capital.” On the
other hand, Green and Hendeshott (2001) noted associated risks of home ownership,
such as lack of mobility, the likelihood that low-income housing will be concentrated
in central cities, and the possible reduction in property values. Weighing all the
evidence from both sides, Green (2001) concludes that “home ownership produces
desirable social outcomes: better neighborhoods, more civic participation, and more
socially healthy children” (p. 27).
47
HUD’s Community Development Block Grant program (CDBG) provides annual
grants calculated according to a population-based formula to entitled cities and
counties to develop viable urban communities principally for low- and moderate-
income residents (USHUD, 2007a). HUD also offers states and local governments a
loan guarantee program, called Section 108, for community planning and
development. The program allows borrowing entities “to transform a small portion
of their CDBG funds into federally guaranteed loans, large enough to pursue
physical and economic revitalization projects that can renew entire neighborhoods”
(USHUD, 2007b, ¶ 4).
Utilization of funds under CDBGs is left up to the entitled governments, enabling
them to develop projects that add to their communities’ well being. However, too
much control and interference by HUD and the Congress has changed the intent of
decentralization of the program and its effectiveness for the worse (Nathan &
Dommel, 1978). Despite these problems, there are success stories. One of these is
described in a Cornell University case study of the 1996 Canal Corridor Initiative
(CCI) for the Upstate New York’s Erie Canal Corridor by Schafft, Barney, Cheney,
and Kay (2004). This project was successful in making use of several government
programs in financing the project, such as a CDBG grant of $60 million, $60 million
in section 108 loan guarantees and $160.2 million in USDA funding. This project
had a “positive effect on developing the Erie Canal as a tourism corridor … and
future job creation and economic growth (Abstract).
48
The Business Assistance Program
The Business Assistance Program is mainly administered by the Small Business
Administration (SBA), although the USDA has a program to finance rural area
businesses through non-profit organizations. The SBA was created in 1953 by the
Small Business Act during the Eisenhower presidency, although predecessor
agencies with similar missions had existed since the Great Depression and World
War II. The Congress amended the Act in recent years (U.S. Congress, 2004).
The SBA’s mandate is to help form and broaden businesses in this country
especially among the unemployed and “socially and economically disadvantaged
persons,” since, according to the Congress, such persons “have suffered the effects of
discriminatory practices” (Section 7). The SBA carries out this mandate by offering
loans to small and start-up businesses, mostly in the form of government guarantees
to banks and financial institutions that participate in the program. In terms of dollars
invested and number of firms financed, the SBA’s record has been impressive. In
2007, the SBA’s loan portfolio reached almost $70 billion, and the agency intends to
make 98,000 loans in that year alone. These numbers are expected to rise in future
years. (SBA, 2007a).
The Small Business Investment Act of 1958, which was also amended later (U.S.
Congress, 1997), further authorized the SBA to help small businesses with equity
and long-term debt by creating Small Business Investment Companies (SBICs) out
of venture capital firms that were willing to make these investments in return for
receiving matching funds from the SBA. Unfortunately, the SBICs have financed
49
non-growth businesses instead of financing promising innovation-based enterprises,
especially from the most discriminated communities (Rubin, 2001). Nevertheless, in
terms of volume activities, the SBICs have increased without significantly changing
their policies. The Small Business Investment Act, as later amended (U.S. Congress,
1997), enhanced the capitalization capabilities of the SBICs. In the 2007 federal
budget, the SBA’s debenture request for SBICs was $3 billion.
Although there is a positive correlation between the SBA’s huge injection of
funds into small businesses and increases in annual levels of employment in low-
income communities (Craig, Jackson, & Thomson, 2007), the entrepreneurs from
those communities have not benefited from those funds because the criteria set by
the SBA have mostly benefited middle-class entrepreneurs (SBA, 2007c). This will
be discussed at greater length in Chapter 4, below.
The most basic and most used type of SBA lending is through the 7(a) loan
program, in which the SBA guarantees 50 to 80 percent of the loan, with a maximum
loan amount of $2 million. The lender and the SBA share the risk in the event of
non-repayment of the loan. The guarantee does not cover other contingencies, such
as imprudent decisions by the lender or misrepresentations by the borrower (Craig et
al., 2007). The risks associated with the partial guarantee make it necessary for the
banks to put in practice mitigation approaches, such as collateralizing the loan with
personal guarantees and assets and ensuring that the borrower has a good repayment
history (SBA, 2007b).
50
In collaboration with a Certified Development Company (CDC), the SBA offers
another major loan program, called 504, which provides long-term financing to
businesses so that they can acquire fixed assets such as land and buildings. A CDC is
a nonprofit entity set up to help the economic development of the communities it
serves. Under the 504 program, 50 percent of the funds for a project come from a
private-sector lender, 40 percent comes from a CDC (which is backed 100 percent by
an SBA guaranteed debenture), and 10 percent from the borrower. The CDC loan is
subordinate to the loan from the private lender. The SBA debenture limit is $1.5
million when a business meets the job-creation criterion of $50,000 for every job
created or retained. The debenture limit is $2 million if a business meets a listed
public policy goal, and $4 million if it meets the description of “small manufacturer”
and creates or retains one job for every $100,000 of funding (Craig et al., 2006;
SBA, 2007b).
A third kind of loan offered by the SBA is a Pre-Qualification Loan, which is
designed to help minorities and women. There is a maximum loan limit of $250,000.
This kind of loan has all the requirements of a 7(a) loan, but with the additional
condition that the borrower has to be of good character and have no bankruptcies or
criminal convictions. The only advantage of this program is that an intermediary
organization helps the borrower with the application, and the SBA makes the loan
commitment prior to the bank’s approval. This arrangement is intended to induce the
lenders to fund the loan, although the SBA’s approval does not compel the banks to
approve the loan (SBA, 2007b).
51
Closing Remarks
The four sets of programs described above are essential for the poor and low-
income members of the country. To varying degrees they have alleviated sufferings
of millions of people. The findings of this chapter, however, point to difficulties with
structure of these programs and implementation in several cases.
The job-training program is run by multiple agencies with little coherence and
planning. It needs to be more coordinated and focussed in objectives. If the training
were labor markets driven with some in depth technical content leading to expertise
in professions in demand in the twenty-first century, impact on income and its
sustainability can be significant. The job corps program is a one-year capacity
building program for the youth. If the training includes, among other things, critical
thinking about entrepreneurial innovation and its dividends, the youth will have
options not to entirely depend on jobs.
Economic programs such as block grants and section 108 loans could be directed
toward empowerment of the low-income people with economic opportunities rather
than toward amenities of better infrastructure.
52
Chapter 3:
Determinants of Poverty Eradication Theory
This chapter establishes the determinants of the theory that employs the remedial
strength of an entrepreneurially innovative and creative culture to dismantle the
psychological impoverishment inflicted by persistent poverty. To that end, the
chapter (a) locates the pertinent components of entrepreneurial characteristics
portrayed primarily by Cantillon (1755), Knight (1921), Schumpeter (1934/1983),
Kirtzner (1979 and 1984), Diochon (2003), and Harper (2003); (b) integrates these
characteristics into a new model of an entrepreneur; and (c) argues that such an
entrepreneur can be nurtured in impoverished communities.
The chapter also develops a concept of “economic development” that is local and
inclusive of the people, thereby creating an atmosphere of social and economic
resurgence. The formulation for “economic development” used here partly follows
Schumpeter’s (1934/1983) distinction between “economic development” and
“economic growth,” while incorporating Diochon’s (2003) concept of Community
Economic Development.
As illustrated in Figure 2, below, the new entrepreneurial activity will
incorporate a support system that enables the innovative entrepreneurs to overcome
all the negatives of persistently poor neighborhoods, develop business plans for their
economic ideas, and obtain financing.
53
Figure 2: Force Interactions Between the NEI and Persistent Poverty
54
Community Economic Development (CED)
It is important to begin with a discussion of Community Economic Development
(CED), because it involves socioeconomic processes that incorporate community
participation and local entrepreneurship, both of which, the literature suggests, result
in communities’ balanced well-being. The concept emanating from CED of
communities and governments working together hand in hand will form the
cornerstone in the argument that fostering an entrepreneurial culture in a poverty-
ridden community can produce a sustainable solution for poverty eradication.
CED is a fairly new phenomenon that has gradually evolved since the mid-1970s,
when, as Diochon (2003) notes, “there was reappraisal of the role of space in the
development process” (p. 10). CED gives prominence to space or territory where, in
Diochon’s words, “local (endogenous) economic and sociocultural factors interact to
influence the development process” (p. 11). The literature also supports the notion
that spatial differences resulting in institutional, social, cultural, and political
differences affect the nature and scope of economic development, thereby giving
each community somewhat unique spatial characteristics in the realm of
development (e.g., Garofoli, 1992; Stohr, 1990). Simply put, a CED paradigm is
comprised of two building blocks: “space” and “development” (Diochon, 2003).
Following World War II and until the 1970s, economic development of regions
within industrialized nations relied on the expansion of urban-based industries and
exogenously controlled central government policies. The importance of local
communities in economic development started receiving attention as a result of
55
global competition, which necessitated increased cooperation between small and
large industries in order to achieve cost control and innovation in product
development. The increased importance of small businesses in creating wealth and
jobs led to the participation of local entrepreneurs and residents in achieving
economic development. The community members increasingly played the role of
stakeholders, empowering them socially and economically (Diochon, 2003; Garofoli,
1992; Nelson, 1993; Stohr, 1990). In the United States, the term community
economic development originated in the 1960s. It has been used increasingly over the
past decade in connection with economic development that mobilizes community
resources in order to improve the well-being of the residents (Blakely, 1989;
Broadhead, 1993; Diochon, 2003; Fontan, 1993; Perry, 1987; Swack & Mason,
1993).
CED as a Collective Socioeconomic Process
Diochon (2003) defines CED as a “process by which a community uses
collective action to improve its well-being and self-reliance according to self-defined
needs and expectations” (p. 66). This definition synthesizes her definitions of
community, economic development, and community economic development. Her
definition of community emerges from many sources, especially Perry (1987) and
O’Neill (1993). In her derived model, community residents are “stakeholders” who
share “behavioural expectations as a result of social relationships” (p. 64), developed
under formal, informal, and interdependent settings during the course of their
56
participation in social, economic, or political activities. Emphasizing that the social
as well as the economic uniqueness of each community demands a unique solution,
Diochon suggests that economic development programs should have the flexibility
of being responsive “to a community’s needs and competencies” (p. 64). In some
communities, “goal(s) may be directed towards social development and in others
economic development will take precedence” (p. 64). In either situation, the process
makes use of a bottom-up approach, local networks, and cultural strengths in the
form of shared beliefs, value norms, and attitudes.
Economic Development Versus Economic Growth
Economists generally measure economic development by noting changes in
primary economic indicators, such as employment, income, and production numbers.
These economic data, however, are not devoid of “social accounting,” because the
economic indicators contain social indicators within, since, as Gross (1996) notes,
“economic information tends to touch everything, often significantly” (p. xv).
Although economic indicators may contain social implications, they may not tell
the whole story, since the “economic state” of a people emerges from what
Schumpeter (1934/1983) calls “the preceding total situation” (p. 58). This includes
the social situation, since, as Schumpeter says, “it is not possible to explain
economic change by previous economic conditions alone” (p. 58). For example, if
the income of a persistently deprived people is increased by providing monetary
help, that may raise the economic indicators of that community, but it may not
57
improve the capacity deficit. On the other hand, if financial help is provided to
temporarily deprived people, it may go a long way to improve their total situation.
This is a critical argument behind the innovation-based entrepreneurial solution to
entrenched poverty that is proposed in this study. Therefore, as Christenson and
Robinson (1989) contend, economic change should include “changing the economic,
social, cultural, and/or environmental situation” (p. 11).
Economic change can be gradual, adapting itself in small steps to a state of
equilibrium, as portrayed in the circular flow concept of classical economics. But
economic change can also be revolutionary, in the sense that it is accompanied by
changes in the economic structure itself, in a relatively short period of time, thereby
pushing the state of the economy to a different level of equilibrium in a dynamic
fashion, as described by Schumpeter (1934/1983). Gradual economic change, if it is
accompanied by upward trends in economic indicators, is what Schumpeter calls
“economic growth,” a concept uncontested by others. In other words, gradual
economic change is simply a change in the size of an economy within the framework
of existing players engaged in the same basic activities. Revolutionary economic
change is what Schumpeter calls “economic development.”
The key test for Schumpeterian “economic development” is the resulting
transformation in the economic order or structure forced by the actions of new
players with new ideas culminating in new economic enterprises, processes, and
technologies. For example, an economic growth caused by forces such as population
growth or acts of war or acts of government in which the economy adapts itself,
58
maintaining economic activities of the same kind with the same players is not
“economic development” (Schumpeter, 1934/1983). But if the economic indicators
rise, or if wealth is generated in the economy as a result of the actions of new players
who create profit centers founded on new ideas and funded by new resources, the
outcome might be deemed “economic development.”
Like Schumpeter, but with two striking differences, this dissertation distinguishes
between “economic change” and “economic development.” The first difference is in
the context of type of domain and population. Schumpeter was macro-focused in
terms of economic cycles in countries, continents, and the world as a whole, whereas
the present case deals with communities and the outcomes that affect the economic,
social, and cultural dimensions at the core of their being. The second difference is
that for Schumpeter “economic development” is a relatively sudden discontinuity in
an economic equilibrium, whereas “economic development” for the present scenario
is more modest in outcome and speed.
“Economic development” as proposed here evolves as a result of entrepreneurial
actions that are linked to learning and to government-induced opportunities and
resources. The enabling process for both kinds of “economic development” is a
phenomenon that Schumpeter called “swarming,” which is a convergence of several
innovational entrepreneurial endeavors during the same period. The exception for
this kind of “economic development” planned in this case is in the configuration of
the “swarming,” which is more in line with Diochon’s (2003) concept of Community
Economic Development. In a nutshell, “economic development” as envisioned in
59
this study integrates the entrepreneurial innovational aspect of Schumpeter’s
“economic development” theory with Diochon’s view of Community Economic
Development (CED), in which the community is the “development actor.”
A significant point that differentiates Schumpeter’s “economic development”
from other, more conventional views, but is compatible with the definition in this
dissertation, is the manner in which the development effort is financed. Schumpeter
(1934/1983) is crystal clear in his view that entrepreneurs must raise the capital for
economic development from outside the currently invested resources or accumulated
profits in the economy, possibly through credit from financial institutions. The
reason for this is that the current resources in savings and accumulated profits are
there for maintaining the equilibrium of the economy by adapting to gradually
changing conditions. Availability of credit is the major enabler in Schumpeter’s
economic development paradigm. This makes sense, since Schumpeter’s “economic
development” is a new phenomenon above and beyond the realm of the existing
economy and is the result of entirely new ideas and the genius of the entrepreneurs.
As it happens, the anticipated enhanced economic and capability outcome in
impoverished communities is also expected to result from new innovations by new
players financed through credit from governments or financial institutions. This does
not contradict Schumpeter’s (1934/1983) concept of economic development, since
he conceded that the use of assistance is permissible if “the carrying out of
combinations authorizes people, in the name of society, as it were, to form them”
(p. 74).
60
In the economic development literature, Schumpeter’s definitions of both
“economic development” and entrepreneurship stand out as unique because they
separate growth from development and entrepreneurial activity from simply starting,
owning, or operating a business for profit, which is a more common understanding of
entrepreneurship.
Other scholarly definitions of “economic change” do not separate “economic
growth” from “economic development” or insist on the latter being entirely
entrepreneur-driven, although some economists recognize that entrepreneurial
activity contributes to economic development. Even Diochon (2003), who favors
local economic development through local entrepreneurship, does not advocate that
“economic development” should be separate from “economic growth.” Although she
emphasizes the role of entrepreneurial innovation in community economic
development, she does not discuss Schumpeterian innovation.
The role of Schumpeterian entrepreneurship in “economic development” does,
however, have strong support from Kirzner (1979), whose own concept of
“economic development” was the result of entrepreneurial alertness to economic
opportunity and its exploitation. Entrepreneurial alertness manifests in arbitrage,
speculation and innovation (Kirzner, 1984a). To Kirzner (1985), short-run arbitrage
and incremental acts of entrepreneurship add up to the emergence of Schumpetarian
entrepreneurs, who, by being first to discover the potential economic value of new
61
resources, bring about economic development (1989). Kirzner was also a firm
believer, like Schumpeter, that the entrepreneur did not have to own capital (Harper
2003)
Harper (2003), who finds Kirzner’s contribution to entrepreneurial theory central
to understanding entrepreneurship, also accepts Schumpeter’s theory of innovation-
embedded “economic development.” To him, “economic development” is
“structuring of knowledge and overthrow of old ideas and organizations” (p. 1).
Coming close to the concept of “swarming,” Harper suggests that one
entrepreneurial action begets another, thereby keeping the economic development
process in motion, and thus a multiplier effect in entrepreneurial energy is achieved.
To Harper, “economic development” is “the overall unintended outcome of a
complex myriad of individual acts of entrepreneurial discovery” (p. 2).
To Hayek (1948), however, entrepreneurs are people who acquire knowledge to
make the best use of resources for “ends only these individuals know” (pp. 77–78).
As Kirzner (1979) says, this leads to a positive economic change. The phrase only
these entrepreneurs know has an affinity with Schumpeter’s view that entrepreneurs
are intuitively unique. For Hayek, entrepreneurial knowledge is acquired through
learning, whereas for Schumpeter it is something unique to individuals, although not
hereditary. Cauthorn (1989) places Schumpeterian entrepreneurs at the center of
economic change, since “entrepreneurial function is critically important to a thriving
economy, whether capitalist, communist, or in between” (p. 3).
62
In order to further explain the nexus between Schumpeterian entrepreneurship
and “economic development,” Schumpeter (1934/1983) set some benchmarks. For
him, “economic development” had three salient characteristics: (1) it comes from
within an economic system and is not based simply on change in economic data;
(2) it occurs discontinuously “by fits and starts” (p. 62); and (3) it brings about
qualitative changes that create a new equilibrium by displacing the old one. These
changes are caused only by entrepreneurial actions and “are not forced…from
without” (p. 63).
According to Macdonald (1971), Schumpeterian capitalism proceeds in
“discontinuous steps, and each wave of improvement is succeeded by relative quiet,
a new position of equilibrium” (Macdonald, 1971 p. 76). Schumpeter’s “business
cycle” theory (1939) explains this through the historical cycles of economic boom
and depression since “the new combinations [i.e., innovations]… are not evenly
distributed through time…but would appear, if at all, in groups or swarms” (
Schumpeter, 1934/83, p. 223). The entrepreneurs appear in groups and clusters
“because the appearance of one or a few entrepreneurs facilitates the appearance of
others—in ever increasing numbers” (p. 228), including copiers of the original
innovation. Other entrepreneurial economists also believe that when an entrepreneur
carries out an entrepreneurial action, a number of other entrepreneurs follow suit
(e.g., Diochon, 2003; Harper, 2003; Kelso, 1994).
63
Schumpeterian Versus Other Conceptions of Entrepreneurs
There are numerous concepts of what an entrepreneur is. For Cantillon (1755), an
entrepreneur was a trader who buys low and sells high; for Say (1816), a manager of
productive factors; for Knight (1921), a proficient risk taker; for Kirzner (1979), an
arbitrageur; and for Harper (2003), an opportunity exploiter. But for Schumpeter
(1934/1983), an entrepreneur was a leader of economic change. The most common
understanding is that an entrepreneur is an owner of or a partner in a business (most
likely in a small business), and this understanding is also the common denominator
in most discussions in the literature about entrepreneurs. Additionally, it is also
generally accepted that being successful in business requires some unique
capabilities. The literature supports this uniqueness theory. For Knight (1921),
entrepreneurs “differ in their capacity” from other people “for perception and
inference as to form correct judgments as to the future course of events” (p. 241).
Kirzner (1979) and Harper (2003) claimed that the key entrepreneurial capabilities
are alertness to profit opportunity and arbitrage.
Schumpeter (1934/1983) advocated a much more aggressive role for
entrepreneurs than others have, although the opportunity-seeking characteristic
remains a part of his equation. Schumpeterian entrepreneurs go beyond seizing an
economic opportunity. Rather, they create opportunities and markets through
innovative new goods, processes, and financing. Entrepreneurs are the creators of
economic development, which replaces old economies with more powerful new
ones, sometimes even by the “creative destruction” of the old ones.
64
Elliot (1983) states that Schumpeter’s innovative process “incessantly
revolutionizes the economic structure from within,” and the “entrepreneurial
innovation is the central autonomous cause for economic development and capital
accumulation” (pp. xx and xxiv). Schumpeter (1934/1983) describes innovation
carrying out new combinations, such as (1) introducing new goods, (2) creating new
methods of production, (3) opening new markets, (4) capturing new sources of raw
materials, or (5) devising new organizational structures. He did not, however, limit
the combinations to five, since he also includes the possibility of financiers and
promoters being entrepreneurs. Furthermore, a Schumpeterian entrepreneur is not
necessarily an “independent” businessperson. He may be one of the “dependent
employees of a company, like managers, members of boards of directors, and so
forth” (p. 75), and does not have to be a “risk bearer” (p. 75), as Knight (1921) had
postulated.
Entrepreneurship Redefined: The New Entrepreneur
The “New Entrepreneur” is a trained innovator. In the present dissertation
project, fostering entrepreneurial activities in impoverished communities will be a
government-financed endeavor, which will include a comprehensive support system
for entrepreneurial learning. This support system will be designed to ensure the
viability of entrepreneurial initiatives in at least two ways. First, the system will
provide information regarding economic opportunities. Second, it will provide
assistance with pre–business plan research. The research will include matching
65
innovations with opportunities, determining the commercial viability of the
innovations and ensuring that the innovations fit into the matrix of viable options for
their intended communities.
The new entrepreneurs will be engaged in a mentally uplifting endeavor, learning
and finding ways to develop new economic solutions. They will not be running
mundane businesses, such as small grocery stores or barbershops since they are not
innovations and they have existed in these communities for a long time and have
done little to act as role models.
The new entrepreneurs will enjoy resource-backed freedom to discover and
pursue constructive new ideas that have economic merit. Their entrepreneurial
discovery will take place in a group setting of training in which one challenging
success should provide seed ideas for other challenging ventures (Diochon, 2003;
Harper, 2003; Schumpeter, 1934/1983).
This dissertation project adopts Schumpeter’s concept of innovation as the core
building block of the entrepreneurial architecture but follows Diochon (2003) and
Harper (2003) in methodologies to achieve the innovation. Hence the entrepreneurs
will not be hedonistically building private kingdoms with a will to conquer the world
with “authority” and “personal weight” (Schumpeter, 1934/1983, pp. 84, 93).
Instead, the new entrepreneurs will develop through learning as Diochon (2003) and
Harper (2003) suggest. The new entrepreneurs will augment their capabilities
through group discussions with each other, through training for specific know-how
in technology, commerce, or management, and through contact with teachers who
66
have themselves been successful innovators. In that process, they will also
experience “the joy of creating, of getting things done, or simply of exercising one’s
energy and ingenuity” (Schumpeter 1934/83 p. 93). This approach, which simulates
Harper’s (2003) method of learning by “seeing” and “doing,” should reinforce the
locus of control (LOC) and self-efficacy of the entrepreneurs, no matter how
economically impoverished they are. The new entrepreneurs may engage in
innovations that reflect their likes, innate capabilities, expertise, or ideas they have
been nurturing.
Just like Schumpeter’s (1934/1983) entrepreneurs, these new entrepreneurs will
not have to possess capital or be risk takers in the capital investments. This is a really
important concept for entrepreneurs who live in communities where there is hardly
any capital. Capitalists or bankers, who will take risks after evaluating the soundness
and marketability of the entrepreneurs’ innovations, will provide the capital. For
Schumpeter, credit financing in a capitalist society was “differentia specifica—for
forcing the economic system into new channels” (p. 69).
The new entrepreneurs can be lone or independent entities, or they can create
joint ventures with others. Moreover, they can market their innovations to large
companies or join these companies as employees in a leadership position or an equity
position.
The innovations called for here do not have to be far-reaching or earth shattering,
like Schumpeter’s; rather, they can be commonsense solutions to existing problems.
For example, an entrepreneur in India recently turned the “auto rikshaw” into a
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luxury vehicle by repainting and refurbishing it with luxury seats, small fans, and
television sets. This has the potential of completely transforming the rikshaw
business if the innovation spreads to the entire city and finally the entire country with
the involvement of other innovative vendors. A comparable simple innovation in the
United States is the modernized lunch carts in the business districts of large cities.
Furthermore, innovations need not follow market demand, since “it is the
producer who initiates economic change” (Schumpeter 1934/1983, p. 65) by
positively exploiting the buying power of the local people and educating the local
consumers about the new product or service. Innovative ways to provide credit to
these consumers will further enhance the economic activity. However, the
enterprises will be free to market their products anywhere in the country or the
world. Exporting the products outside the community will bring more dollars into the
community.
The new entrepreneurial definition is also in agreement with Schumpeter’s
(1934/1983) contention that “it is not the owner of stagecoaches who builds
railways” (p. 66). The owner of stagecoaches maintains a money-making operation
either by staying in equilibrium with the demands of the economy or by adapting to
incremental changes in the economy. Such an owner, however, is not an innovator.
Neither is the owner of a retail chain that has been gradually built up over time from
one small store. To be thought of as innovative, there would have to be such changes
as a restructuring of the company to incorporate a newly invented and more efficient
inventory management system or to overhaul the product lines to open new markets.
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Such changes would be innovative because they would be likely to set new trends
and bring about discontinuously higher levels of economic activity, thereby
jettisoning the previous equilibrium. The building of the railways was precisely such
an entrepreneurial innovation on a huge scale.
The size of a business, however, does not determine whether or not it is
innovative. Innovation simply incorporates new ideas or new combinations of ideas
that increase the economic efficiency of an enterprise in ways that are marked by
suddenness in change and difference of level. Innovation is present if an entity
changes its line of products or services to a new state of the art where the outcome
emerges suddenly. In other words, the new entity emerges all on a sudden with
changes in the efficiency, perception, and understanding of businesses for customers
in similar product or service lines.
Innovations can be well within the reach of ordinary people because big
innovations in the current context may involve the coalescence of many smaller
innovations (Diochon, 2003; Nadler & Tushman, 1991). Although Schumpeter
concerned himself mostly with the global economic landscape, innovations on this
smaller scale are totally consistent with his definition.
As stated earlier, grocery stores and liquor stores are not ordinarily instances of
innovation. But they may be innovative if they are stocked with the best products
from all over the world, offer a customer-centric environment in which it is easy to
find everything, and provide an elegant layout and quick customer processing,
thereby elevating the store to a structurally different level of modernization. For
69
example, Trader Joe’s was started as a different kind of wine store, with a variety of
excellent wines from all over the world. It was an innovation because it offered a
different image, character, and set of choices, which discerning middle-class
customers happily welcomed. The explanation for Trader Joe’s success is that it was
not simply a building full of goods but an economic engine adding value to
customers by enhancing their choices of state-of-the-art products with safety
features, and making it easier and pleasing for them to shop. These attributes
increased the likelihood of expansion and hence of higher neighborhood economic
activity.
Shops with innovations like these are likely to invite additional innovations by
entrepreneurs who approach them with new technologies, products, and marketing
ideas that continually improve the store and generate new partners in the supply
chain. In a similar vein, opening an organic food store, when it was a new idea, was
an innovation. The key is to make the store a convergence of art, science,
psychology, product know-how, and marketing. Opening a customer-friendly
barbershop with customized services such as a fitness program and nutrition
information and products may also be an innovation. An example of a high-tech
innovation might be to provide a wireless communication link to remote areas by
using a new technology or improving an old one in a new way, achieved by unique
capitalization of the project.
The principal innovation may be the outcome of several innovations in the fields
of financing, development of supply chains, logistics, and software adaptation. The
70
entrepreneurs who carry out these innovations may be self-employed professionals
or small business owners. Furthermore, following the definition used in this study,
employees who devise an entirely new process that enables a project to be completed
more efficiently than ever before are also entrepreneurs.
Many entrepreneurial innovations begin with a new interpretation of an existing
theory, finding, or commonly held belief, which then leads an individual to envision
applications that others have not thought about. The innovation process starts in
small steps, each one being an improvement of a different kind, and cascades in the
end into a larger innovation. Innovation “can result from small, incremental
introductions or improvements or from large, discontinuous ones” (Diochon 2003,
p.70) That is why people who do not have much formal education have been able to
initiate innovations that had consequences beyond their wildest dreams. In most
cases, innovators of this type were really adept at partnering with other innovators
with whom they developed the connecting links that combined into the impressive
phenomenon.
There are also examples of how scientific investigations of folk beliefs have
resulted in impressive entrepreneurial innovations. One example is the Bossa Nova
Beverage Group in Los Angeles, founded by Alton Johnson, who built his company
around the juice of acai, a Brazilian berry. During a trip to Brazil, Johnson learned
about a long-held belief there that the berry had healing properties. When he
investigated the berry with scientific tests, he discovered that it was an excellent
71
antioxidant, and so he started his juice-bottling company. The company currently has
annual sales of $4 million dollars (Barrett, 2007).
Can New Entrepreneurial Skills and Attitudes Be Acquired?
The evidence suggests that entrepreneurial abilities are dispersed in all cultures
and communities (Cannon, 1992; Diochon, 2003; Gibb, 1987; Harper, 2003; Kyle,
Blais, Blatt, &Szonyi (1991); Stevenson & Gumpert, 1992). Given all this evidence,
one can reject any arguments that, in Harper’s (2003) words, “depict a culture as
inherently pro-or-anti-entrepreneurship” (p. 4). Furthermore, in the current context,
the acquisition of the new entrepreneurial skills is facilitated by unprecedented
quality of technical assistance and full financing under the New Entrepreneurial
Initiative (NEI) described in chapter 4.
Nevertheless, the persistence of poverty in black neighborhoods has raised
questions regarding the chronic lack of self-help and entrepreneurship in these
communities. To prove their point, critics cite data on such topics as welfare
dependency, crime rates, and the high numbers of unwed young mothers (e.g.,
(Kelso, 1994; Light, 1972; Portes, 1995). Without challenging those data, others
blame black poverty on the Whites’ treatment of blacks through extreme segregation
and other policies that prevented them from prospering, even in their own
communities (e.g., Butler, 2005; Green & Pryde, 1996; Wilson, 1996). Prior to the
passage of “Jim Crow” laws in the 1890s, they argue, blacks were active participants
in setting up enterprises of all kinds. The pros and cons of the above evidence make
72
the proposed NEI all the more relevant in order to revive the entrepreneurial abilities
of the poor blacks.
It is reasonable to assume that there are people, even in impoverished
communities, who have innate capabilities to do things or perceive certain
opportunities or outcomes better than others, and some of these individuals have
been tinkering with innovative ideas, eager to make them happen. For them,
proceeding further is just a matter of opportunities and resources. The NEI is what
they have been waiting for. Moreover, their street sense, acquired as they overcame
setbacks and learned to survive (Harper, 2003; Kelley, 1996), should augment what
Bandura (1997) called the “sense of efficacy to sustain one through the stress and
discouragement inherent in innovative pursuits” (p. 455).
Diochon (2003), for whom entrepreneurship is a form of innovation, observed
that “every individual has some degree of entrepreneurial potential,” and
“entrepreneurship can be acquired if individuals are given an opportunity” (p. 4). In
specific reference to black entrepreneurship, Green and Pryde (1996) stated that
“every society has individuals who are better positioned to take advantage of
entrepreneurial opportunities” (p. 13).
The technical assistance given to the entrepreneurs will help them to develop
their cognitive abilities in two ways: (a) in terms of the know-how involved in their
project; and (b) in terms of becoming alert to evaluating possibilities. Learning to be
an entrepreneur is the foundation of the current study. As Diochon (2003) observes,
“because innovation involves originality, learning is an inherent part of the process”
73
(p. 71). This learning involves the gradual acquisition of the psychological
components of “alertness,” including intuition (Schumpeter, 1934/1983), speculation
(Harper, 2003; Kirzner, 1984a,), conjecture (Harper, 1996; Popper, 1963), and risk
taking (Knight, 1921). However, once the innovation is completed, the change in the
outcome is sudden, in contrast to the gradual adjustment to equilibrium that has been
described by classical economists ever since Adam Smith (1776).
Accomplishing an entrepreneurial innovation in the form of a new product or
process will require learning the nuts and bolts of the steps leading to the innovation.
Trial and error during the implementation phase should gradually help the new
entrepreneurs to make decisions with limited information, to sense possible
outcomes after every step, and to develop contingencies. Harper (2003) calls these
“abilities to learn without deliberate research” (p. 35). Repetition is also an important
process for learning, since, as Green and Pryde (1996) noted, “cultures evolve from
repetition and intensity of routine interactions” (p. 13). Repeated contacts with
mentors and experts will help to shape a culture of entrepreneurial thinking and
analysis.
Sexton and Bowman-Upton (1991) enumerate several paradigmatic skills and
traits involved in entrepreneurship: “problem-solving, creativity, decision-making,
taking action amid uncertainty, negotiating, planning, and persuasiveness” (pp. 16–
17). All of these skills and traits can be learned from the entrepreneurial training
proposed in the current study, which involves repeated exposure to data, discussion
of examples of successes and failures, and regular association with successful
74
individuals. This last element of the proposed program is equivalent to Harper’s
(2003) “learning by seeing.”
Entrepreneurs in this program will also have the advantage of checking their
ideas with their mentors as they formulate their plans. This will help them to acquire
confidence in their assumptions and decisions, which gradually should heighten their
awareness of elements of alertness. This process comes close to Harper’s (2003)
“learning by doing.” In essence, the support system will develop agency beliefs that
promote feelings of self-efficacy and locus of control (Gatewood, Shayer, & Gartner,
1995; Harper, 2003).
Clearly, motivation is an essential attitudinal requirement for learning. Acquiring
skills must be intertwined with motivation to initiate and achieve a positive
entrepreneurial outcome. As Diochon (2003) cautions, “People need to be motivated
to initiate action towards realizing an opportunity” (p. 74). Even Harper’s (2003)
definition of self-efficacy includes motivation within it. Motivation also depends on
one’s opportunity and personal situations, such as whether or not one is content with
one’s employment. Vesper (1990) calls the desire for independence a “push” factor
and the pursuit of an idea a “pull” factor. For the new entrepreneurs involved in the
current project, who have faced economic segregation, both the “push” and “pull”
factors will apply.
Horizontal interactions with community members (Portes, 1995) help develop
social capital (Putnam, 1994) which helps entrepreneurial environment.
Downplaying the role of individualism in entrepreneurial development, Bonaparth
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(1976) emphasized instead the role of society and community. This is especially true,
as Green and Pryde (1996) note, of black entrepreneurial development. “Studying
entrepreneurs apart from their social context,” wrote anthropologists Greenfield and
Strickon (1979), “is like studying animals independent of their natural habitat”
(p. 17).
The New Entrepreneurship as an Antidote to Dependency
“Dependency” is often mentioned in reference to the poor. Historically,
“dependency” has been defined in terms of labor market participation—that is, as
Axinn and Stern (1988) noted, “anyone who works for wages or a salary or is self-
employed is productive, anyone else is dependent” (p. 41). These authors concede,
however, that “socially useful participation” such as unpaid care taking and
volunteering are also productive activities, and therefore should be excluded from
dependency data. Essentially, awardees of public money and welfare benefits are the
ultimate dependents. Axinn and Stern presented their dependency data as a
Dependency Ratio, which they defined as the number of dependents per 100 in a
population.
The Dependency Ratio simply indicates what percentage of a population is
receiving public assistance at a given time, and the data can be categorized by
groups, such as children, women, the elderly, and so on. A time-based data profile of
a community may even indicate the persistence of dependency. However, like
official poverty indicators, it takes no account of the social and psychological
76
implications of being dependent or poor. Dependency appears to be a by-product of
poverty, since welfare recipients are dependents. Therefore, capacity deficit should
be an integral part of the dependency paradigm.
On the other hand, the new entrepreneurship, which is linked to innovation, is, in
Galtung’s (1981) words, “the cornerstone of self-reliance and autonomy” (p. 177).
The innovation-driven new entrepreneur is a critical thinker who deciphers economic
opportunity from real-world information (Hayek, 1948) and learns “by doing” and
“by seeing” (Harper, 2003). Thus, the new entrepreneur’s sense of self-efficacy is the
total opposite of the attitude of surrender characteristic of dependent personalities.
Furthermore, the new entrepreneurial environment contains a support system that
encourages people to take stock of their personal strengths and weaknesses. At the
same time, they are encouraged to exploit their strengths by attending seminars and
conferences at which information is provided about economic opportunities in the
community and about available financial and technical assistance (Aldrich &
Zimmer 1986). These horizontal interactions tend to eliminate any atmosphere of
isolation and shame. Interdependency on fellow residents while shaping innovations
is completely antidotal to the effects of mental dependency. A person with developed
“self-efficacy” and “locus of control” that are evolved during entrepreneurial
learning (Harper, 2003) is not likely to be a victim of dependency. As Sen (1992)
noted, agency is “brought about by one’s own efforts” (pp. 56–57). In other words,
an entrepreneur solves his or her own problems.
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Survival Entrepreneurship Capital in Impoverished Communities
Although some of the urban poor in the United States currently show
vulnerability to the temptation of criminal activity and other means of immediate
gratification, they also show evidence of entrepreneurial talent, survival instincts,
and respect for core societal values (Portes, 1995; Wilson, 1996). The human skills
that are developed when the poor are forced to survive form an unappreciated but
very real basis for entrepreneurship. After all, they live with uncertainty and
sometimes real physical danger on a daily basis and make do with limited resources.
The support structure that is planned for the new entrepreneurial paradigm seems to
be the right vehicle for exploiting the survival capital to develop innovations.
The survival capital theory that underlies the present project is supported by the
observations made by Kelly (1995), who saw “impoverished ghetto dwellers as
innovators bent on recreating meanings that are viable in limited environments”
(p. 242). Kelly explained that ghetto insularity paradoxically “leads to creation of a
rich symbolic repertory aimed at transforming vulnerability into a precarious display
of individual affirmation, self-individuation, and status” (p. 215). These attitudes can
be seen not only in criminal activities, such as drug selling and prostitution, but also
in the phenomenon of adolescent girls becoming unwed mothers for the pride of
motherhood. Referring to one 15-year-old mother, Kelly wrote, “Every step of her
disfigured life, she deployed knowledge and made decisions to control resources
available in her environment” (p. 241).
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This theory of making the best of one’s circumstances also applies to the
“informal economy” (Portes, 1995), in which entrepreneurs, in order to survive,
engage in non-legitimate business practices that, unlike prostitution and drug selling,
are productive, such as sewing garments in clandestine workshops and vending
goods on the street without a license. As Portes noted, “discrimination, official
hostility, and lack of resources have forced…[these people into]…informal, menial,
and badly paid activities” (pp. 29–30).
The informal economy involves survival innovation in terms of finding new
ways into economic activities, although there is little or no social acceptance of this
phenomenon as a mainstream entrepreneurial innovation. Nevertheless, there are
many things in common between the capabilities developed during the effort to
survive amid dire poverty and the capabilities required for entrepreneurial
innovation. Some of these qualities include tenacity, street sense, and being
undaunted by failure. There is no question that these capabilities can be harnessed
for constructive entrepreneurial endeavors. Noting the widening gulf between ghetto
underachievers and upwardly mobile overachievers, despite their having many skills
and qualities in common, Green and Pryde (1996) suggested that what is needed “is a
pragmatic hard-headed black entrepreneur to link the resources of the two extremes
in legitimate social and economic enterprises” (p. 115).
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Entrepreneurship/Self-Employment Among Native-Born Blacks
By most accounts, poverty among native-born blacks, whether they live in urban
tracts or rural areas, is the most acute and persistent of any population in the United
States (e.g., Jargowsky, 1997; Light, 1972; Portes, 1995; Wilson, 1996). The data
also suggest that these black Americans do not have a favorable disposition toward
being self-employed or starting small businesses (e.g., Boyd, 1990; Brown & Errie,
1981; Gutman, 1974; Kelso, 1994; Landry, 1987; Lieberson, 1980; Light, 1972;
Portes, 1995; Sowell, 1981, 1983; Wilson, 1996). Table 9, below, provides empirical
verification for these observations. The data in the table indicate the self-
employment rate in 167 metropolitan areas for different ethnic and racial groups,
based on the number of self-employed individuals per 1,000 able-bodied adults in the
workforce in the locality. For example, foreign-born Whites ranked first in 59.3
percent of the metropolitan areas, second in 29.3 percent, and so on. Blacks, on the
other hand, ranked fifth in 74.3 percent of the metropolitan areas, fourth in 20.4
percent, and so on.
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Table 9:
Rank of Mean Self-Employment Rates by Race and Place of Birth
Within 167 U.S. Metropolitan Areas
Rank
Foreign-
Born
Whites
(%)
Native-
Born
Whites
(%)
Asians
(%)
Hispanics
(%)
Blacks
(%)
Total
(%)
1 59.3 12.6 25.1 2.4 0.6 100.0
2 29.3 48.5 19.8 2.4 0.0 100.0
3 5.4 34.7 37.1 18.0 4.8 100.0
4 4.8 4.2 11.4 58.7 20.4 99.5
4.5 0.0 0.0 0.6 0.6 0.0 1.2
5 1.2 0.0 6.0 18.0 74.3 99.5
Total 100.0 100.0 100.0 100.1 100.1
SOURCE: Portes (1995), p. 181.
There are some anomalies in the table. For example, normally high ranking
foreign-born Whites ranked last in 1.2 percent of the metropolitan areas, normally
high-ranking Asians ranked last in 6.0 percent of the areas, and normally low-
ranking blacks ranked first in 0.6 percent of the areas. To explain these phenomena,
Portes (1995) articulated a resource theory, which proposed that some areas offered
higher resources for a particular group than that group usually had.
Fairlie (2004) found a pattern of ethnic self-employment rates that was very
similar to the pattern found by Portes (1995). In his study, approximately 11.6
percent of White workers in the nation were self-employed, whereas 3.8 percent of
black workers and 6.8 percent of Hispanic workers were self- employed.
Furthermore, Fairlie and Meyer (2000) found that the 3 to 1 ratio between White and
black self-employed has remained relatively constant over the past 80 years. It is not
surprising that poverty in the United States has an inverse relationship with self-
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employment and entrepreneurship in the racial landscape, since a positive linkage
between economic development and entrepreneurship is well established (e.g.,
Diochon, 2003; Green & Pryde, 1996; Harper, 2003; Kirzner, 1984a, 1984b; Portes,
1995; Schumpeter, 1934/1983).
Furthermore, the self-employment route has been proven to be economically
more rewarding than regular employment, even for less educated individuals,
including blacks. For example, Fairlie and Meyer (2000) found that earnings of
poorly educated young business owners were higher than those of poorly educated
young salaried workers. Fairlie (2004) found that self-employed black and Hispanic
young men had higher mean and median earnings after a few years of work than
their wage and salary counterparts. As Glazer and Moynihan (1970) noted long ago,
“Business is in America the most effective form of social mobility for those who
meet prejudice” (p. 36).
The evidence for the entrepreneurial route rewarding individuals who have been
discriminated against strengthens the argument behind this dissertation’s theory of
eradicating persistent poverty from poor neighborhoods through innovative
entrepreneurial activities. The discouraging entrepreneurial data on blacks is,
however, a measure of the immensity of the challenge.
There are several theories in the literature that attempt to explain Blacks’
reluctance to pursue self-employment. For example, Kelso (1994) noted that, during
the Reconstruction period, elite blacks had close ties to their White former owners
and displayed little pride in their own race. At that time, self-employed black
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individuals such as barbers were looked upon as menial workers. In the years after
Reconstruction, a small active black elite emerged who had relatively high status in
their own community, based on such factors as the lightness of their skin or their
being descended from house servants rather than field servants. These elites looked
down on their less fortunate brothers and sisters (Gatewood, 2000).
This type of false status became important in black culture, which led to the low
status of self-employment and small business ownership. Even at the turn of the
twentieth century, the few black small business owners, such as undertakers and
restaurant owners, had a low status (Garreau, 1991; Kelso, 1994). Light (1972)
associated the cultural impoverishment of native blacks with the legacy of slavery
and the hypocrisy of such institutions as the Urban League and the National Business
League for ignoring the blacks and instead cultivating Whites for the sake of
obtaining financing. Portes (1995) traced the lack of solidarity among blacks and
their preference for jobs and education over entrepreneurship of any kind back to the
Niagara conference of 1909, “at which the followers of W. E. B. DuBois routed the
leadership of Booker T. Washington” (p. 202). As Light (1972) noted, the Urban
League, instead of being “an organization of community participation,” degenerated
into “coteries of the more successful Negro businessmen banded together on the
basis of shared material interests” (p. 115). In place of brotherhood, Light observed,
“there was structural isolation of the unsuccessful,” which “persistently interfered
with the organization’s capacity to stimulate Negro-owned business” (p. 115). As a
result, the black elite were primarily ministers, teachers, doctors, and other
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professionals. (Garreau, 1991; Kelso, 1994). The next emerging black elite were
politicians and government administrators, who acquired power and status through
government programs and jobs (Kelso, 1994).
There is evidence, however, that black entrepreneurship goes all the way back to
slavery, and prospered until it was undermined during the “Jim Crow” days,
beginning in the 1890s. Butler (2005) laments that many contributors to the
sociology of entrepreneurship have, for some reason, ignored the history of the
entrepreneurial tradition among African Americans. In support of his thesis, he cites
DuBois (1898), Minton (1913), Harris (1947), and Pierce (1947) for their recognition
of the history of black entrepreneurship and innovation. Butler posits that, in 1910,
blacks “were as likely as Whites to be self-employed” (p. 42) and “developed
enterprises in almost every area of the business community prior to the Civil War,
including manufacturing, construction, trades, transportation, and extractive
industries” (p. 43).
Butler (2005) has produced a long list of schools, churches, banks, and insurance
companies owned by blacks before the introduction of the “Jim Crow” laws. After
them, however, it became difficult or impossible for blacks to set up businesses.
Nevertheless, despite this harassment, they were able to set up the Durham
Enterprise enclave in North Carolina, which still stands today as a monument to
black entrepreneurship. On the other hand, in Tulsa, Oklahoma, Whites set fire to the
Black Enterprise Center after the blacks refused to sell their valuable land.
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For the last thirty or forty years, blacks have taken advantage of affirmative
action and other government programs to move out of poverty and join the middle-
class community. Many have become entrepreneurs, business owners, business
executives, entertainment personalities, athletes, and members of various
professions. All this proves that there is nothing genetic that is keeping blacks from
becoming entrepreneurs.
From the above discussion, two safe inferences can be drawn. First, the black
community is just like any other community, insofar as it has leaders and followers,
entrepreneurs and workers. Second, slavery and segregation had a debilitating impact
on the psyches of poor blacks, but the damage has not been irreparable. As a matter
of fact, the repairs have already begun. For example, Reynolds, Carter, Gartner, and
Green (2002) found that, in the United States, educated black men are about 50
percent more likely to start up a business than White or Hispanic men.
To poor Blacks, this finding may have little relevance to their neighborhoods,
since it is about blacks with considerable education. The point is that awareness of
the potential of entering an entrepreneurial career is rising among blacks, at least in
one important segment of them. Furthermore, blacks’ contacts with other minorities
are increasing as they work together for common interests (Jones-Correa, 2001). In
the course of these contacts, they are likely to find role models among immigrants
who have successfully created substantial business enterprises from the ground up.
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Closing Remarks
This chapter establishes the theoretical basis for the NEI. Two critical points are
raised in this chapter. First, the entrepreneurial innovations have a community
implication just as persistent poverty does. Second, an important element of
eradication of persistent poverty is a process of achieving Schumpeterian (1934/83)
“economic development” which is not simply an economic growth but a structural
transformation of the economy of the community.
This chapter has also argued that the transformational characteristic of
Schumpeterian (1934/1983) economic development can be replicated in a
community through the newly defined entrepreneurship. The structural
transformation of the economy will involve dismantling the economic stagnation of
the poor communities on a permanent basis by breaking down the psychological
stagnation. This will be accomplished through an intervention that will enable people
help themselves develop innovative economic solutions. Furthermore, just as capital
for Schumpeterian (1934/83) innovators is raised through credit, capital for the
community’s entrepreneurs will be raised with the help from the government
sources.
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Chapter 4:
The New Entrepreneurial Initiative (NEI)
Overview
This chapter outlines the framework of a New Entrepreneurial Initiative (NEI) to
render into practice the theory derived in Chapter 3. The NEI calls for a fundamental
change in the current public policy in order to eradicate persistent poverty in the
United States. The NEI shifts the emphasis of public policy on poverty from a
welfare regime to promotion of self-reliance by enhancing the innovation-driven
entrepreneurial capabilities of people in poor, especially black, communities.
The NEI organization will be equipped with a highly competent entrepreneurial
support system which will seek out from within the impoverished communities
candidates with entrepreneurial motivation, mentor and train them in entrepreneurial
and technical skills. Furthermore, the NEI will be backed by a newly created public
venture capital fund to finance innovation driven projects with promising
commercial prospects.
The NEI would be a federally funded organization headquartered in Washington,
D.C. It will be administered by an independent board comprised of eminent
entrepreneurs from the private sector who have successfully built enterprises from
the ground up and members of the public sector who have extensive experience in
rebuilding communities. The NEI will maintain local organizations that will provide
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service directly to the people, with assistance from local governments (see Figure 3,
below). The SBA Administrator should head the independent NEI organization as a
facilitator and executive director. Other members of the board may be appointed by a
committee of secretaries of federal agencies involved in economic development. It is
expected that the SBA will redirect a part of their resources to finance the NEI’s
operation and to capitalize the public venture fund for enterprise financing in
collaboration with other federal agencies with budgetary allocations for economic
development and poverty alleviation.
For the NEI to succeed, it must facilitate full participation of the local
communities in its programs. It is important, however, to keep the NEI focused
exclusively on the members of the community, and not allow the program to be
diluted by the local politics, as has been reported in the case of Empowerment Zones
and Enterprise Zones (see section below on Local Politics…).
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Figure 3: Organization Chart for the New Entrepreneurial Initiative
Turning Challenges into Economic Opportunities
Entrepreneurial innovations are needed to turn the challenges that communities
face into economic opportunities, and there is no dearth of challenges in the urban
ghettos or other persistently impoverished communities.
There is any number of potential opportunities for innovation in a neglected
community. For example, a shut-down industrial unit can be transformed through
innovation into a state-of-the-art unit, which not only can make products that can
carve a niche in the U.S. market or abroad, but can also utilize low-tech workers. The
boarded shops can be turned into new-generation retail outlets. The latest technology
can be used to turn brownfields into viable living or work spaces in a step by step
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process of remediation. Modern and innovative service centers can be set up to fill
the needs of the local population and attract customers from other communities.
Innovative privately owned nursery or primary schools with day-care centers can be
set up for children. A high-tech crime detection and prevention system can be
developed with local law enforcement agencies to control crime in the community.
An innovative placement organization can be set up to train and find jobs for people
who are just coming out of jail or prison. While the list can go on and on, the
important point is that the people in the community will become architects of their
own lives. This process may attract some enterprising people who had left the
community out of frustration.
Resemblance to President Clinton’s New Market Initiative
That the proposal being recommended here is not farfetched can be seen by the
fact that a proposal along similar lines was made by President Clinton in his State of
the Union Address in 2000 and included in his 2001 budget as an economic program
called the New Market Initiative, or NMI (Yago & Pankaratz, 2000). This program,
which was supported by the SBA, HUD, and the Department of Treasury, included
venture capital, tax credits, technical assistance, and mentoring. It was designed for
small operations whose owners had little business expertise in the financing process
and little financial resources. The technical assistance was to be provided by a
partnership between the SBA, the U.S. Department of Treasury, and the business
community. Unfortunately, this program was lost in the political process. Unlike the
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NMI there is no budgetary approval required for financing the NEI, since it would be
part of the SBA’s function already authorized by the Congress. It is simply a case of
SBA’s undertaking a new approach to serve the poor and minority communities in
fostering innovational entrepreneurial activities in a more effective fashion. Other
federal agencies participating in the NEI may be able to use discretionary authority
to provide funding within the limits of their own approved budgets. These agencies
may have to report their new activity to the Congress to fulfill the oversight
requirements.
Dealing with the SBA’s Culture
Notwithstanding criticism of the SBA regarding abrogation of its responsibility
toward the poor, the SBA is uniquely positioned to play a central role in
implementation of the NEI for several reasons (see the section on Why the SBA
must…). The first and the foremost reason is the mandate of the law that created the
SBA, that is to enhance business formation by minorities and the underprivileged.
This mandate fits in with the mission of the NEI. Second is the SBA’s budgetary size
and purpose allocations which can be used for enterprise financing for this program
(see the section on Sources of Capital). The third is the SBA’s authority to issue
government guarantee for financing start-up and small businesses. The fourth is
SBA’s experiences in debt as well as equity financing of start-up and small
businesses. Furthermore, the SBA’s experience in coordinating the Small Business
Innovation Research Program (SBIR) created by the Congress, may prove extremely
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helpful in developing the structure of public venture capital system (see below
Precedents….).
The challenge lies in the prevailing culture of fear of loss in investment not only
in the SBA but also in all the federal agencies. Start-ups and small businesses
generally have higher failure rates and so the SBA finds it safer to use conventional
and commonly used criteria of household financing in making business loans. Any
innovation away from these criteria, especially for the low- income entrepreneurs,
involves risks, which no bureaucrat is willing to take.
The NEI’s approach of setting up a new organization separate from the SBA is
based on an assumption that it will be more difficult to change the existing SBA
culture than to set up an independent organization and achieve the desired result.
Discussions with some SBA officials on individual basis indicate that some of them
are also concerned about not being able to help the low-income communities. They
may be persuaded to adopt a different approach if it was found feasible.
The role of the SBA’s administrator as executive director of the NEI is critical
because he or she can be instrumental in bringing to bear the financial wherewithal
already approved by the Congress for the intended purpose of the program. Every
effort should be made to get the NEI vetted at the top management level of the SBA.
Precedents, Risks and Rewards of Public Venture Capital Financing
In the United States, there are two significant precedents of public financing of
technological innovation conducted in the private sector. One is the Congress’
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mandated Small Business Innovation Research (SBIR) program, which has been
“relatively effective” (Lerner 2004, p. 13, Lerner 1999). This program, which was
first authorized by the Small Business Innovation Development Act (1982), “
mandated that all federal agencies spending more than $100 million per year on
external research set-aside 1.25 percent of these funds for awards to small business
(Lerner 2004, p. 12). Subsequently this set aside was increased to 2.5 percent, which
in 2008 represented about $2 billion (SBA 2008). The SBIR program is unique in the
sense that it is a major government undertaking that helps innovative individuals
with little capital in sowing seeds for business formation if they can articulate their
ideas on paper. The SBIR is a grants program that provides one hundred percent
financing of seed capital to an individual for validating a promising new technology
in theory and practice.
This SBIR program is administered in three phases. Awards for phase I are made
through competitive proposals. If selected for phase I, the awardees receive $50,000
to $100,000 to determine initial feasibility of their ideas. The projects that have
shown promise during phase I are selected for a phase II award of $500,000 to
$750,000 for the purpose of further validation of the technology and
commercialization potential (Lerner 2004). Department of Defense (DoD) in its
SBIR solicitation identifies a commercialization phase which it calls phase III. For
phase III funding has to be obtained from other on going DoD programs, or other
government agencies or private sector. Success in acquisition of funds for phase III
will count favorably in subsequent SBIR awards (DoD 2007)
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The disadvantage of the SBIR program is that it does not completely finance the
commercialization phase, which is critical to achieve final success in bringing the
product to the market. After investment of almost a million dollars of public money
in phases I and II, it requires the individual innovator to find an established business
partner to put up the funds for capitalization. This is an extremely difficult task in the
real world. As a result, many validated new technologies never reach the market
place. The NEI solves this problem by providing capital and technical assistance to
the innovative entrepreneur until the enterprise becomes a commercial organization.
The NEI is an investment program with a provision that the taxpayer’s money is
returned with interest. The financing model will incorporate methodologies for risk
mitigation.
The second public venture fund program worth mentioning is the Department of
Commerce’s Advanced Technology Program (ATP). This program funds pre-
commercial technology and awards range from a few hundred thousand dollars to a
few million dollars to a single firm or joint ventures. Between 1990 and 1997, this
program funded approximately one billion dollars to 300 companies (Gompers and
Lerner 1999, Lerner 2004).
There are several other programs of the federal and state government that provide
equity financing to early stage firms through government guarantees. In 1995, these
programs financed “$2.4 billion, more than 60 percent of the amount disbursed by
traditional venture funds in that year” (Lerner 2004, p.1, Lerner 1999).
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There is increasing role of public venture capital in other countries. For example,
the U. K. government is drastically enhancing the role of the government in
providing seed capital to enterprises in formation on the Japanese model “ for
manufacturing that dominated the world during the 1980’s and early 1990’s
(Anderson 2003, p.2). The U.K. government is providing direct funding and
financial guarantees to jump-start entrepreneurial activity (Anderson 2004).
Germany has created 800 federal and state government agencies over the past two
decades in order to provide public venture capital financing to technology intensive
start-ups (Lerner 2004, Organization for Economic Cooperation and Development
1996).
The private venture capital industry is quite speculative. Private venture
capitalists are looking for extremely high growth companies with quick exit
potential. On the other hand “government as a venture capitalist can stay with a
promising investment longer for the public good” (Anderson 2003, p.12). In the case
of the NEI, the investment can carry interest unlike private venture capital and so
there is no reason for a quick exit. Repayment is planned from profits or exit can
occur through joint ventures, sale or merger with larger companies under the
condition that the majority of the ownership and control stays with the local
entrepreneurs.
Some indicators for performance of private venture capital , the SBA loans and
SBICs are available, although they are not conclusive. Out of 795 private venture
capital investments made over three decades, 22.5 percent ultimately went public
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(Gompers 1995, Lerner 2004). Earlier analysis of 110 private venture capital
investments indicated that one in six investment was a complete loss and 45 percent
were either complete loss or simply broke even (Huntsman and Hoban 1980, Lerner
2004). In 1995, the loss rate for the SBA’s 7(a) loan was 11.85 percent after sale of
the collateral (SBA 2006). In 2004, The SBA’s SBIC program sustained an
impairment of 29 percent (SBA 2008). Lerner (2004) notes that “many SBICs made
investments in ineffective and corrupt firms” (p. 19).
Venture capitalist, such as Fred Wilson of Union Square Ventures, confirms the
common view in the industry that the primary reason for failure of firms with private
venture capital investment is the inability of the management to adapt their business
model to changing market conditions and not controlling the burn rate (Wilson
2008).
In the NEI, losses will be minimized by the risk mitigation embedded in the
program whereby the business plan development occurs under the guidance and
mentoring of accomplished business founders and the post-funding activities of the
companies are monitored. This feature of the program is likely to reduce risk of
failure rate. To achieve risk mitigation the post-funding assistance is designed to
keep a watch on the burn rate and facilitate timely course corrections by the
companies in response to changes in the market, technology, and competition.
Longer exit period for the investment will also reduce the risk by allowing the
company time to adapt to market forces.
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Fostering New Entrepreneurship in Impoverished Black Communities
There are at least two important findings that lead one to believe that the new
entrepreneurship can be fostered in poor black communities under the right
circumstances. First, the literature suggests that new entrepreneurial capabilities can
be acquired through learning, and that there is little or no genetic basis for
entrepreneurship (e.g., Diochon, 2003; Harper, 2003; Wilson, 1996). Second,
American blacks’ reluctance to be self-employed or to own small businesses (e.g.,
Kelso, 1995; Light, 1972; Portes, 1995) may be a psychological reaction to the
extreme discrimination they have faced in the United States in recent decades, since
they showed considerable propensity for entrepreneurship during the pre-
Reconstruction period (e.g., Butler, 2007; Fratoe, 1986; Green & Pryde, 1996).
However, the poor, especially the blacks, remain skeptical of the government’s
seriousness in helping them beyond the welfare system, and so the challenge lies in
convincing them of the genuineness of the proposed program. People need to
understand that this program is geared toward helping them to help themselves by
exploiting their resources and opportunities for their own and their community’s
benefit. The primary requirement for their entry into the program is their
commitment and dedication. Unfortunately, the poor are used to attending meetings
organized by the authorities and community organizations with empty promises of
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assistance, after which they return home frustrated and wondering why the
authorities could not set conditions that they could meet.
12
To overcome poor people’s misgivings about qualifying for the proposed
program, it must be made clear from the very beginning, in ways that will be fully
discussed below, that full access to capital and other resources will be available to all
local entrepreneurial candidates who are judged capable of actualizing their plans,
and that the judging will be fair and above board. This transparency will assure
people that if they work hard, they will have a chance to succeed in the program,
which will hopefully usher in a new sense of enthusiasm in the community.
The task here is not simply to train people to become entrepreneurs, but to foster
an entrepreneurial culture in a community that never before had one. A recognized
social attribute for developing prosperous communities is horizontal communication
and solidarity among people, whereby they consider their neighbors their equals
(Portes, 1995). In other words, people should be able to freely ask questions, share
their ideas, and network with officials and peers. This increases communities’ social
capital, a proven enabler of prosperity (Putnam, 1993, 1994). Interaction in a group
setting, as afforded by the NEI, is also important for entrepreneurial learning, since
becoming an entrepreneur requires the sharing and vetting of ideas (Diochon, 2003;
Green & Pryde, 1996; Greenfield & Strickon, 1979; Shapiro & Sokol, 1982). As
12
For example, in the writer’s own experience, when he was the lead consultant for the
Southwest Los Angeles County Small Business Development Center from 2001 to 2004, his job was
to promote the SBA’s financing products to communities in the area, which included Watts and
Inglewood. As far as the residents were concerned, however, the Center’s slogans and promises were
hollow, since these people could not qualify for SBA loans.
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Fratoe (1986) noted, group self-help support networks play “a critical role in the
formation and success of ethnic minority business” (p. 5).
The good news is that educated blacks are becoming more motivated than ever to
become entrepreneurs (Reynolds, Carter, Gartner, & Green, 2002). Furthermore,
Blacks are closing the information gap by acquiring broadband access to the Internet
at an unprecedented rate. As recently as 2005, only 14 percent of blacks had
broadband Internet access, compared to 30 percent of all U.S. households. By 2007,
however, black households with cable modem, DSL, or satellite Internet connection
had risen to 40 percent, compared to 47 percent of all U.S. households (Crockett &
Ante, 2007).
Given all these trends, the goal for the New Entrepreneurial Initiative should be
to harness the evolving positive undercurrents in the black communities to achieve
enhanced entrepreneurial activity and intertwine this energy with the survival skills
developed in the ghettos.
Local Politics, Community Organizations, Crime and Violence
In implementation of the NEI, the roles of local governments including law
enforcement agencies and the community leaders will be extremely important. At the
same time, the lessons learned from the failures of the past and existing poverty
related initiatives in reducing or eradicating poverty can not be ignored. For
example, Empowerment Zones (EZs), established by the federal government as
platforms for community participation in the revitalization of depressed urban areas,
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have failed to achieve their objectives by most accounts. Gittell, Newman, and
Pierre-Louis (2001), after reviewing the performance of the EZs in Atlanta,
Baltimore, Chicago, Detroit, and New York over a period of three years, determined
that they were a missed opportunity. Their report points to the parochial and vested
interests of community organizations that acted as agents of established businesses to
receive the EZ funds and tax credits. A few jobs were created for the locals, but no
funding for setting up businesses was available for them, since they could not
qualify. The report also mentions that the local mayors and city councils interfered
with the EZs by wrestling control of the decision-making power from their boards
(Gittell et al., 2001). Furthermore, in a study of EZs across the nation, the U.S.
General Accounting Office (2006) found that the lack of proper record keeping made
it difficult to draw conclusions about the EZs’ performance.
The results of studies of the California Enterprise Zones, which are similar to
federal Empowerment Zones, are also not encouraging, at least in the long run.
Dowell (1995) and the Bureau of State Audits (1995) both concluded that the
Enterprise Zones were not effective in creating jobs. O’Keefe and Dunstan (2001)
found that job growth was not significant after the mid-1990s, since the credits and
deductions allowable to businesses became progressively smaller. On the other hand,
Bostic (1996), after analyzing business license revenue and nonresidential
construction, concluded that the Enterprise Zones in the state were effective as a part
of the larger economic development program. Bostic and Prohofsky (2006), based on
analysis of tax returns of workers hired under the Enterprise Zones program, report a
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positive impact on both their wages and adjusted gross income (AGI), which were
more pronounced in cases with low initial income. Agreeing with O’Keefe (2004),
however, they also observed that “the beneficial wage and income effects are
observed only in the short run” (Bostic and Prohofsky 2006, p.201).
Reports on the performance of EZ’s are either negative or marginally positive in
terms of jobs and income. No report addresses creation of new business ownership
by low-income residents of the community as a result of the EZ program.
Qualification requirements for business credit being similar to the SBA loans,
acceleration of business ownership by low-income residents through the EZ program
seems highly unlikely. Moreover, the poverty levels in these communities indicate
that there has been little improvement, which is what matters for the NEI.
The finding of Gittell et al. (2001) on the unhelpful role of the self-serving
political and community leadership in implementing the well-meaning bottoms up
policy embedded in the EZ program is extremely important to guard against. Hence,
it imperative that the NEI’s independence is assured not only by the constitution of a
structurally independent governing board but by the quality and eminence of its
members.
It is clear that any organization that deals with people in a community cannot do
its job effectively without the cooperation of the local government. The local
government’s support can be earned by marshaling the support of the people in the
community. The NEI incorporates several features of “rational choice theory” of
institutional design that make collective opinion of people in its support easier to
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obtain. First, it implies Pareto improvement in the utility of the participants because
it helps people to be better off without making any one worse off. Second, it
incorporates Pettit’s “motors” and “levers” of incentives and opportunities” which
should make it easier to achieve consensus (Pettit 1996). Third, it maximizes
information in order to minimize any asymmetry (North 1990). Fourth, it encourages
free discussion of “ideology, norms and preferences”, making them less effective in
influencing human behavior (North 1990, p.20, Nelson and Silberberg 1987).
All these features reduce the transaction cost of implementing the NEI program
making it easier (Coase 1960). When the people are aboard the NEI, the priorities of
the local government will change and a political-will of the community will emerge
to support the initiative. A positive cost-benefit analysis should further induce city
governments to become partners in the program.
For the local governments, there is a potential for higher revenue streams from
the expansion of entrepreneurial activity. It will depend on increases in the sales tax
base, combined with revenues associated with the rise in per capita income and in
property taxes as home ownership increases. Since the enterprises helped by this plan
will be innovation-driven, most of them will not be mom-and-pop stores, and hence
the rise in the numbers of higher paid employees should be significant, thus yielding
higher revenues to the local governments.
Unfortunately the local community organizations don’t have the resources or
authority to help a person with an entrepreneurial venture in a substantial fashion.
They can only provide encouragement and cursory technical assistance. For these
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community leaders, however, their organizations are their main sources of
employment. These leaders are intelligent and capable people and can be brought
into the entrepreneurial pool of the NEI. They are generally aware of the economic
and infrastructural challenges facing the communities and they are also in contact
with people in the community who are trying to start entrepreneurial ventures.
The support of the law enforcement to keep violence and criminal activities at
bay from the activities of the NEI can be assured by working on projects of their
interest. For example, some economic projects can be encouraged in the area of
monitoring and detection of crime or in the area of rehabilitation of people who
happened to get involved in criminal activities in their youth.
Rationales for 100 Percent Public Venture Capital Financing
Several points can be raised in favor of one hundred percent federal government
financing of commercially viable innovative enterprises started by entrepreneurs in
poor Black communities. The first and foremost point is the actual economic
situation on the ground. The poor have no savings to invest in entrepreneurial
ventures. They also have no financial assets to sell or pledge to raise seed money.
Moreover, fewer ghetto residents are expected to have good credit, especially when
the current scoring system is stacked against low-income borrowers (Collins,
Harvey, & Nigro, 2001). The only asset these people have is their human capital,
which will be augmented by the proposed program through training and mentoring.
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The second point is that full financing of enterprises or business plans through
venture capital is not a new concept in the high-tech field. Moreover, private venture
capital financing offers maximum value to entrepreneurs’ intellectual property
during the valuation of their start-up companies. The entrepreneurs are rewarded for
their ideas and their ability to put together a feasible plan and a management team.
Although a public venture fund, such the NEI, may not be as speculative in
enterprise valuation as a private venture fund, the financial technology inherent in
the system will facilitate fair proportioning of the entrepreneurs’ start-up equity.
The third point is that access to private venture capital for entrepreneurs from
poor communities is improbable. The private venture capital industry tends to
concentrate in known geographic areas, such as San Francisco’s Silicon Valley and
Boston’s Route 128 (Rubin, 2001). It also has a tendency to herd in niche disciplines,
such as information technology, Internet-based technology, and biotechnology. For
example, in the year 2000 alone, 92 percent of private venture capital went to firms
specializing in information technology and health care (Lerner, 2004). In contrast,
the industry mix for community economic development will be diverse and
multidisciplined, depending on the technical background of the local entrepreneurs,
the local workforce, and the communities’ resources and demographics.
Furthermore, as Lerner (2004) argues, the private venture capital industry has limited
funds, compared to public venture capital, and the latter can fund projects that not
only yield moderate financial returns but also high social returns.
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The fourth point is that poverty eradication falls within the domain of
government policies for economic and social change. Currently, the federal
government is involved in financing projects connected with the alleviation of
poverty. Therefore, it should approve the new financial technology of public venture
capital.
Sources of Capital
Two sets of funds will be required for the New Entrepreneurial Initiative, one to
pay for the operational costs, and the other to finance the start-up enterprises. The
operational budget will have three components, in order to pay for: (a) the
administrative costs of the central organization; (b) the administrative costs of the
local organizations; and (c) the costs of technical assistance, including the mentors.
The operational budget may also include scholarships for promising entrepreneurs
while they are planning their businesses. Sources of capital for the operating budget
can be the federal agencies that normally make grants to local governments for the
purposes of economic development and poverty alleviation. For rural poverty
eradication projects, the USDA may fund the operational costs.
The source of all enterprise financing capital should be the SBA, since it is the
primary federal agency for financing small businesses in the nation. It is also clear
from the size of the SBA—with a loan portfolio in 2007 of $70 billion—that the
New Entrepreneurial Initiative will not place great strains on its resources. For the
year 2007 alone, the SBA’s 7(a) loan budget request was $17.5 billion, a 22 percent
105
increase over the previous year. Its 504 budget request was $7.5 billion, a 50 percent
increase over the previous year. Its Small Business Investment Company (SBIC)
debenture request was $3 billion. The SBA planned to make loans to 98,000
businesses in 2007 (SBA, 2007a).
For reasons to be described below, the SBA could help to create a public venture
fund for the enterprise financing of the NEI by guaranteeing the capital investment
from banks and other financial institutions that are already working with the SBA
under its loan program.
Why the SBA Must Help to Create the Public Venture Fund
The evidence will show that the SBA is not currently meeting its obligation to
serve the underprivileged in business formation. The SBA has the means and the
authority to provide adequate capital to deserving innovation-driven entrepreneurial
candidates from poor communities. As explained above, public venture capital is the
most viable source of financing for the New Entrepreneurial Initiative. Furthermore,
venture capital financing is not foreign to the SBA, since it is already involved in the
SBIC and in Minority Enterprise Small Business Investment Companies
(MESBICs).
There are several reasons why the SBA must help impoverished communities in
keeping with the financial realities of these communities. One is the SBA’s current
nonconformance with the law that gave birth to it, the Small Business Act of 1953.
Congress created the SBA not only to ensure the health and growth of small
106
businesses in this country, but also to broaden the ownership of commercial
enterprises among people who control little productive capital and are unemployed
and disadvantaged. This can be seen right in the Act itself, which states in part:
The assistance program authorized by sections (7i) and (7j) of this Act
are to be utilized to assist…small business concerns (1) located in
urban and rural areas with high proportions of unemployed and low-
income individuals; or (2) owned by low-income individuals; and to
mobilize for these objectives private as well as public managerial
skills and resources…. Certain groups control little productive
capital…because they have limited opportunities for small business
ownership…. Broadening of small business ownership among groups
that own and control little productive capital is essential to provide for
the well-being of this nation…. Such persons are socially
disadvantaged because of their identification as members of certain
groups that have suffered the effects of discriminatory practices or
similar invidious circumstances over which they have no control….
Such groups include but are not limited to Black Americans, Hispanic
Americans, Native Americans, Indian Tribes, Asian Pacific
Americans, Native Hawaiian Organizations and other minorities.
(pp. 2–3)
The current standard operating procedures of the SBA loan programs (SBA,
1999) do not meet the intent of Congress. For example, the flagship lending
program, 7(a), which is offered with government guarantees, requires borrowers to
invest one-third of the capital, to have good credit, to provide personal guarantees,
and to pledge all their assets to the lenders, irrespective of the amounts they borrow
(SBA, 2007b). All this makes the SBA’s requirements heavily stacked against low-
income and minority communities, and thus the well to do become the unintended
beneficiaries of the program.
107
After reading the text of the Act, one can infer that Congress took into account
the risks associated with start-ups by new and inexperienced entrepreneurs from
underprivileged communities, so it authorized the SBA to protect the banks’ interests
by issuing guarantees, and Congress also mandated technical and managerial
assistance. One could also conclude from this mandate that the SBA was expected to
develop assistance methodologies to fit the social and economic realities of
impoverished communities in order to foster an entrepreneurial culture in those
communities. Employing conventional household financing practices could not
achieve this.
The SBA’s own data indicate that its lending criteria do not allow Blacks or
Hispanics to get their share of loans, as can be seen in Table 9, below, for the
flagship SBA 7(a) loan program. The situation is even worse when one realizes that
the figures in the table are for all Blacks and all Hispanics, so the figures for ghetto
Blacks and barrio Hispanics would be even lower.
108
Table 9: SBA Loan Approvals: Fiscal Years 2004–2006 (to nearest $1,000)
2004
Total
7(a) Loans
To All
Minorities
To African
Americans
To
Hispanics
To
Asians
To Native
Americans
To Other
Minoritie
s
Number of
Loans
81,133 24,176 4,646 7,077 10,996 765 692
Percentage
of Loans
100% 31% 6% 9% 14% 1% 1%
Total
Dollars
Approved
$13.372
billion
$4.163
billion
$402.450
million
$906.343
million
$2.700
billion
$96.715
million
$57.350
million
Percentage
of Dollars
Approved
100% 31% 3% 7% 20% 1% <1%
Average
Loan
Amount
$164,810 $172,206 $86,474 $128,069 $245,578 $126,425 $82,876
2005
Total
7(a) Loans
To All
Minorities
To African
Americans
To
Hispanics
To
Asians
To Native
Americans
To Other
Minoritie
s
Number of
Loans
95,900 28, 362 6,438 8, 081 12, 202 792 849
Percentage
of Loans
100% 30% 7% 8% 13% 1% 1%
Total
Dollars
Approved
$15.224
billion
$4.824
billion
$532.318
million
$1.004
billion
$3.107
billion
$96.492
million
$83.880
million
Percentage
of Dollars
Approved
100% 32% 3% 7% 20% 1% 1%
Average
Loan
Amount
$159,409 $170,082 $82,684 $124,260 $254,635 $121,833 $98,799
2006
Total
7(a) Loans
To All
Minorities
To African
Americans
To
Hispanics
To
Asians
To Native
Americans
To Other
Minoritie
s
Number of
Loans
97,290 31,958 6,971 10,316 12,924 838 909
Percentage
of Loans
100% 33% 7% 11% 13% 1% 1%
Total
Dollars
Approved
$14.524
billion
$4.946
billion
$590.064
million
$1.149
billion
$3.019
billion
$92.063
million
$95.689
million
Percentage
of Dollars
Approved
100% 34% 4% 8% 21% 1% 1%
Average
Loan
Amount
$149,285 $154,753 $84,646 $111,396 233,584 $109,860 $105,268
SOURCE: SBA (2007c).
109
Another reason for the SBA to change its financing policies is the flawed risk
considerations in its current lending practices. Investment in a commercial enterprise
has different underpinnings from those in a household. To begin with, the likelihood
that a household loan will be repaid may be predicted by the borrower’s history of
managing finances and paying credit obligations on time—or, in the case of default,
by the sustainability of the value of the collateral. Therefore, in household financing,
collateral, credit history, and down payment are important variables, especially the
first. On the other hand, the profitability and cash flow of a business are mostly
dependent on the business’s economic performance, which in turn depends on the
management team’s acumen in coordinating every aspect of the enterprise, including
market forces and adequate financing. Clearly, business financing is far more
complex than household financing.
Furthermore, unlike household financing, the events of business enterprises
overtake the founders’ individual disposition to pay bills on time. Also, the capital
involved is generally larger than the personal wealth of the entrepreneur. The
collateral formed within a business is good only if the business is doing well, and
becomes minimal if the business fails. Therefore, a comprehensive risk analysis that
incorporates all variables that may affect a business’s performance should be a part
of any business plan. Financing decisions must be made after these issues are
evaluated. This explains why venture capital and commercial financing are driven by
the quality of the business model, the experience of the management team, the
barriers to competition, the potential market share, and the support system that the
110
company has put together in terms of directors, advisors, and mentors. It is not
claimed that the SBA and its lending partners give no weight to the business plan
while making a decision but their individual qualification requirements of the
borrower become a primary basis for consideration.
The SBA’s minority investment program of Minority Enterprise Small Business
Investment Companies MESBICs or Specialized Small Business investment
Companies (SSBIC) is poorly funded. Although the SBA’s budget request for SBIC
debentures for the year 2007 was $3 billion, private capital invested in the SSBICs
has usually been low, and many SSBICs have closed due to lack of funds or
profitability. For example, as of September 30, 2000, only 59 of the 286 SSBICs
licensed over the life of the program were still active. The 59 funds had a combined
total of $143 million in private capital (Rubin, 2001). Furthermore, partly due to the
hands off oversight approach of the SBA only a few of the MESBICs did well
financially, and those few did so by not following the intended rules of the program
(Bates, 2001). The MESBICs were created to finance minority-owned ventures in
order to create goods, services, and jobs, but they actually engaged in safe asset-
based lending, such as financing thousands of New York taxicab medallions for
well-to-do clients, who could have gotten financing from conventional sources.
Nevertheless, despite these safe investments, MESBICs lost money because of poor
management (Bates, 2001).
111
NEI and the Local Governance
Despite several federal assistance programs to the local governments for
economic development in low income communities poverty in many tracts persists.
For example, the objective of the CDBG program, according to HUD (2007a), is to
provide “decent housing, a suitable living environment, and opportunities to expand
economic opportunities, principally for low-and moderate-income persons” (¶2). The
CDBG program is, in fact, flexible and broad, comprising several components, such
as the main federally administered program, state-administered CDBGs, the Section
108 Loan Guarantee Program, and so on. Since federal policy is clear in its mission
and intent, the flaw must be in the implementation, which is in the hands of local
governments, since they design their programs and write the grant proposals. The
same is true of the utilization of EDA grants to local governments, since the EDA’s
(2007) mission “is guided by the basic principle that distressed communities must be
empowered to develop and implement their own economic development and
revitalization strategies” (¶ 2).
Unfortunately, the management of local governments is driven primarily by
revenue expansion to meet rising expenses. Under this scenario, the cities and
counties can become revenue-rich by bringing in enterprises from outside, thereby
raising their income from sales and real estate taxes, while at the same time doing
little to eradicate the poverty among their residents. For example, the jobs created by
retail outfits brought in from outside are generally limited in number and employee
income. These outfits mostly hire young people at the minimum wage, which is
112
unlikely to remove poverty. If a city brings a large manufacturing plant into the
community, the company may offer well-paying jobs, but not necessarily to the
members of the community. This is because it will hire only trained and experienced
candidates.
The enhanced tax revenue base that results from attracting such enterprises may
be good for the city administration, which can then pay for improved services and
infrastructure, but this higher revenue will not eliminate the residents’ poverty. There
is also an inherent unsustainability in this arrangement because exogenously
controlled businesses can change their minds, especially after initial benefits expire,
and move to another city that offers better terms. At the same time, the local poverty,
if not addressed, will continue to further strain the city’s resources.
The grants from HUD, EDA, and other federal agencies can be utilized for
entrepreneurial innovation so that people can learn to build prosperity for
themselves. The NEI can be used to facilitate that process. The question is how
significantly this approach will enhance local governments’ revenue base. Higher
sales taxes, higher real estate taxes, and an increased share of income taxes due to
higher per capita income from better-paying jobs and possibly higher rates of
employment are similar to bringing businesses in from outside. The difference is that
the revenue growth with the new approach, although slower in the beginning as the
new enterprises need to be nurtured, will eventually be higher and self-sustaining,
because most of the money will be spent inside the community.
113
Because expenses will not wait for future earnings, local governments may
balance this new approach by bringing in some industries from outside at the same
time. The task for local governments that face persistent poverty is to reinvent
themselves by working with possible partners, such as the NEI organization, to
develop a support system that can foster the proposed entrepreneurial culture of
innovation and generate financing for the administrative costs by writing grant
proposals.
Responses to Points That Critics May Raise
The New Entrepreneurial Initiative is far from being a giveaway program for
Blacks and other minorities. Based on capitalistic principles, it is an investment
program designed to replace welfare handouts with a quality business environment,
job creation, and revenue streams. Yet, apprehensive critics may point to the
difficulties in changing people’s anti-mainstream ethics into a hard-work ethic that is
required for entrepreneurial ventures especially innovation-based ones. Such critics
may brand the present proposal a fantasy or wishful thinking and question the
possibility of harnessing the political will of impoverished communities to change
their ingrained culture of dependency and immediate gratification. To counter these
concerns, one may argue that doing something new and creative is likely to engage
restless minds that are suffering from a sense of humiliation and are eager to prove
their worth. Moreover, people desire a chance to maximize their potential.
114
The critics may also cite the old politics of the black elite, which has never
worked in the interest of the poor. Unfortunately, the current facts on the ground
indicate that the political leaders of some of the poor communities have had their
own vested interest in maintaining the status quo, and may not be interested in
opening a hornet’s nest of self-reliance to imperil that self-interest. Fortunately, as
discussed above in this chapter (see Fostering new entrepreneurship…), black
society is changing and is becoming more positively inclined toward entrepreneurial
activity.
The argument that inadequate education is responsible for the poor economic
performance of blacks and others in the twenty-first-century job market may be
extended to the current proposal as well. Some observers (e.g., Kelso, 1994; Sowell,
1981) may even question the well-documented phenomenon of credit rationing in
low-income communities (e.g., Craig, Jackson, & Thomas, 2007; Stiglitz & Weiss,
1981), one of the justifications of this program. Such critics may say that there are
poor people in every community, so why should this program be designed
specifically for blacks and Hispanics? The answer lies in the urgency caused by the
enormous carrying cost of poverty. Nonetheless, the question remains how to create
the political will in communities and bureaucracies to pursue this initiative
successfully.
Regarding the question of inadequate education, the entrepreneurial learning
environment is not as structured as that of the job market, where a definitive
requirement for formal education is set to evaluate applicants. Entrepreneurial
115
learning has been found to be self-driven and opportunity-guided (e.g., Diochon,
2003; Harper, 2003). The New Entrepreneurial Initiative will help to identify
economic opportunities and foster entrepreneurial learning in a supportive,
unstructured environment.
Since the current poverty alleviation programs are not eradicating poverty, a
fundamentally new direction is needed, which clearly must be of a self-help nature.
Thus, the New Entrepreneurial Initiative, which is based on the self-help principle,
deserves serious attention. In fact, the suggested approach has much in common with
Congress’s intentions when it has passed poverty-related legislation since the 1960s.
Furthermore, capital for the administrative costs can be found within the framework
of existing laws, and capital for enterprise financing can be found with only minor
changes in existing federal policies, without any need to change existing laws.
To address the issue that there are poor people in all communities, not only black
and Hispanic ones, this plan should be applicable to any persistently poor
neighborhood. The proposed entrepreneurial remedy deals with the economic, social,
and political impact of extreme poverty endured by communities over a long period
of time. It is not race- or ethnicity-centric, although black poverty is the model on
which the diagnosis has been constructed.
As a matter of fact, NEI’s public venture capital system and entrepreneurial
learning program should be extended to finance innovative enterprises in new
technologies, even with moderate growth potential, through out the country to
enhance the competitive edge of this country.
116
The NEI’s Local Operation and the Entrepreneurial Support System
Each geographic region, East, West and the South, will be under a direct charge
of one director of the central board, who will be responsible to the board. Each local
center will have a deputy director to perform administrative functions. The central
board will appoint all local directors, who will comprise the support system It is
important, however, to ensure that the local governments are a part of the local
support system as clients but have no control over it.
Basically, the program will have five entrepreneurial support functions: (a) to
promote the details of the program to the general public; (b) to collect and
disseminate information about economic opportunities; (c) to select candidates for
entrepreneurial training, decide the amounts of their training stipends, and conduct
the training; (d) to approve financing proposals; (e) to provide enterprise financing;
and (f) to provide post-funding technical assistance. Functions (a), (b), (c), and (f)
can be performed by groups within one organization, which has been described
above as the support organization. Function (d) can be performed by a committee,
with some of its members serving for limited terms, and others serving as experts for
particular proposals. Function (e) can be performed by a public venture fund that is
specifically set up for this program.
117
Implementing the Program
The Implementation steps for the NEI is presented in figure 4 below. To start
with, three important questions must be answered: (a) Who will champion the
program? (b) How will it be vetted by different stakeholders? (c) How can the
political will for it be created?
To start with a nonprofit organization has been formed to champion the program,
and is already seeking funds to promote the concept. Once the funding is in place,
the organization will make presentations to local banks, cities, counties, and other
players in the fields of economic development and community revitalization to help
them vet the concept. In Washington, D.C., representatives of the organization will
meet with officials from the SBA, the EDA, and the Federal Reserve System.
An important milestone in the implementation process will be for the government
agencies to do a cost benefit analysis (CBA) involving one community. The agencies
might hire a major consulting firm to conduct this CBA for them. The first step will
be to select a representative poor community that will be the subject for the CBA.
The assignment for the CBA will include this task. The starting point could be the
table 3 of the dissertation, which lists high poverty neighborhoods. In 1990 there
were 1,329 neighborhoods in this country with poverty rates 40 percent or higher.
The latest Census tape, which has this information, could be accessed and the ten
communities with highest poverty rates could be identified. The next step should be
to construct specific profiles for the ten communities such as (1) infrastructure and
economic opportunity profile, (2) entrepreneurial profile and (3) welfare profile.
118
The infrastructure part of the first profile will incorporate information such as
access by road, rail, air and sea. Information on schools and colleges, hospitals,
banks and entertainment centers are also relevant to the infrastructure profile. The
economic opportunity part of the profile will consist of information on economic
activities in the community as much as possible. Relevant information could be data
on existing businesses in the community, closed industrial and commercial facilities
if any, population demographics and large businesses that exists within 100 miles
radius. The city government’s planning document will also be helpful. This profile
can be graded on the scale of 0 to 1.
In order to develop the entrepreneurial profile a survey needs to be conducted in
each community to determine any entrepreneurial background such as the number of
people who have been self-employed or been part owners of small businesses for a
period of a year or more. Questionnaires will be distributed to those who have lived
in the community for at least a year. Response could be collected by door to door
contact or through neighborhood meetings. The proof of residence of a family can be
confirmed from utility bills. The questionnaire should also ask if someone had ever
desired or tried to get into business or someone ever designed or invented a gadget.
Information regarding education of each individual should also be asked. All people
with any entrepreneurial background or desire and all professionals such as teachers,
accountants, lawyers, entertainers, community activists and high school graduates
can form the entrepreneurial pool for the community. The community
entrepreneurial profile will be the ratio of entrepreneurial pool and the community
119
population. The sum of the infrastructure and economic profile, and the
entrepreneurial profile will be called NEI feasibility indicator.
The data for the welfare profile can be obtained by compiling total government
assistance to the community members including welfare, food stamp, Medicaid,
housing assistance and job training together with grants to the local governments
from the federal and state agencies. The welfare profile is the ratio of total assistance
and the population. The welfare profile is indicative of the urgency for the NEI. The
community with NEI feasibility indicator closest to its mean value and the welfare
profile of mean or higher can be selected for the CBA.
The CBA will estimate the total operating cost of the NEI for that community,
including the contributions in kind by the private sector over a reasonable time. The
operating cost will be compared with the total of increase in revenue, reduction in
expenditure on welfare and other assistance, social benefits due to crime reduction
and better up keep of the community. The increase in revenue can be in the forms of
sales taxes paid by the new enterprises and the new employees, social security and
income taxes paid by the new employees, and real estate and other taxes paid by new
home owners and improved rental housing. The revenues generated from new
ancillary units and supporting institutions such as schools, entertainment centers and
associated commercial centers that are likely to spring up as a result of higher
spendable income of the employees should also be added. An assessment period of 7
years is reasonable, allowing 2 years for enterprises to be set up and 5 years that
usually takes an enterprise to be profitable.
120
Assuming that the CBA is positive, the SBA should then take the lead to form
the NEI and take the initial operational steps in the ten selected communities. The
next step will be to give a more focused second scrutiny to candidates whose
questionnaires were selected for the entrepreneurial profile and select 10 or 15
percent of them for the next review. Members of the technical assistance support
group should meet these individuals in group settings and grade their oral
performance, and ask them to fill out a detailed questionnaire developed by the
headquarters to test their innovational merit. This should result in selection of
candidates for stipend and a six months of training and mentoring to develop their
ideas into business plans.
Positive signs for availability of entrepreneurial talent should emerge during the
discussions in the group setting. It will be a good sign if some individuals show some
ability for critical thinking about a project they have in mind. In fact, it will be a real
breakthrough. The next breakthrough will occur when at least a few of the trainees
can sustain their hard work and dedication to the point where they develop a formal
business plan.
121
Figure 4: Implementation Steps for the NEI
122
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Abstract (if available)
Abstract
This study takes a fresh look at why high levels of poverty persist in certain American neighborhoods despite billions of dollars having been invested over decades by the government. To overcome this problem, the author proposes a New Entrepreneurial Initiative (NEI) as a policy solution. The thesis of the NEI is that to eradicate persistent poverty it is essential to foster self-reliance in the affected communities through entrepreneurial innovations.
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University of Southern California Dissertations and Theses
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Asset Metadata
Creator
Sinha, Sachidanand
(author)
Core Title
Fostering a newly defined entrepreneurship in impoverished communities: a key component of the solution for eradicating poverty in America
School
School of Policy, Planning, and Development
Degree
Doctor of Planning and Development Studies
Degree Program
Policy, Planning, and Development
Publication Date
04/16/2008
Defense Date
10/09/2007
Publisher
University of Southern California
(original),
University of Southern California. Libraries
(digital)
Tag
black poverty,OAI-PMH Harvest,persistent poverty
Place Name
USA
(countries)
Language
English
Advisor
Bostic, Raphael (
committee chair
), Barak, Michalle Mor (
committee member
), Groome, Jerry (
committee member
), Richardson, Harry W. (
committee member
)
Creator Email
ssinha@usc.edu
Permanent Link (DOI)
https://doi.org/10.25549/usctheses-m1135
Unique identifier
UC1440832
Identifier
etd-Sinha-20080416 (filename),usctheses-m40 (legacy collection record id),usctheses-c127-57979 (legacy record id),usctheses-m1135 (legacy record id)
Legacy Identifier
etd-Sinha-20080416.pdf
Dmrecord
57979
Document Type
Project
Rights
Sinha, Sachidanand
Type
texts
Source
University of Southern California
(contributing entity),
University of Southern California Dissertations and Theses
(collection)
Repository Name
Libraries, University of Southern California
Repository Location
Los Angeles, California
Repository Email
cisadmin@lib.usc.edu
Tags
black poverty
persistent poverty