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The New Republic.

Growing the Inner City?
August 23, 1999

By Tamar Jacoby and Fred Siegel

Tamar Jacoby, a senior fellow at the Manhattan Institute, is the author of Someone Else's House: America's Unfinished Struggle for Integration. Fred Siegel, a senior fellow at the Progressive Policy Institute, is the author of The Future Once Happened Here: New York, D.C., L.A., and the Fate of America's Big Cities.

President clinton's well-scripted "New Markets" tour didn't include a stop in Harlem, but it should have. Barnstorming across the country last month, posing in shirtsleeves on an Appalachian farm, in the Mississippi Delta, and in the Watts section of Los Angeles, Clinton hoped to sell the nation on a new, "third way" poverty program: a package of federal tax credits and loan guarantees intended to stimulate private investment in neglected neighborhoods. His proposals, which will soon go to Congress, reflect a new consensus, even on the left, that the answer to poverty is capitalism--not government handouts but private business. Corporations would tap into a forgotten pool of workers, while mainstream investors and indigenous entrepreneurs together would create a local economy that edged out ghetto culture. In theory, it's a great idea. But, before Congress rushes to approve the money, it should take a closer look at Harlem, where a 15-year experiment with a similar public-private model has produced mixed results. The notion of harnessing market forces to eliminate poverty has hardly been limited to Harlem. Championed by Jack Kemp during the 1980s, the idea was reengineered by Democrats a decade later in the form of empowerment zones: legislation offering not just tax credits (Kemp's idea) but also sizable government grants and loans for businesses in poor areas. In New York, the concept dovetailed nicely with longtime local efforts pushed by Democrats and Republicans alike to get local government out of the antipoverty business and to use private financing to build public housing.

The good news is that, thanks to these programs, Harlem is now awash in cash. The New York empowerment zone has three times as much money as its counterparts in other cities: a total of $300 million in public funds that it hopes to leverage over ten years with $1.25 billion in private money. And, together with some spillover prosperity from midtown Manhattan, these efforts are beginning to change the landscape above 110th Street. Encouraged by government subsidies, private developers have rebuilt or restored tens of thousands of apartments, providing homes for a stabilizing population of working-class families. For the first time in memory, a handful of national retail outlets have opened in the area: Starbucks, Duane Reade, RiteAid, Pathmark, Blockbuster Video, and Sterling Optical. Two major shopping complexes with multiplex movie houses are in the works, and even Harlem leaders, traditionally mistrustful of capitalism, are acknowledging what the market can do to lift the neighborhood out of poverty. "I recognize that, in order for this community to change, somebody's going to have to make a buck," says popular city council member Phil Reed. "I don't have a problem with that. "

Administrators trying to engineer a market takeoff hope the government will eventually be able to bow out of the process. As publicly subsidized investment turns a profit, it will spawn a second generation of spontaneous business growth. Banks will be more willing to make loans. Supermarkets, pharmacies, and family restaurants will not only create jobs but will also draw working-class families--and then the middle class--back to the neighborhood. And this, in turn, will attract still more commercial investment--eventually without the help of public-sector incentives.

But none of this has actually happened yet in Harlem. A virtual city within a city, the neighborhood has as many residents as Atlanta. Much of the area is still vacant or crumbling. And while the officials midwifing change talk disparagingly of programs that create a "welfare mentality," they stop short of promoting a genuinely market-based approach. For all of upper Manhattan's competitive advantages, they believe, mainstream business will not find its way to Harlem without government intervention. They may be right: some government stimulus and incentives still seem necessary to spur market activity in the area. But, as long as government is involved, it will bring inefficiency, bureaucracy, and politics. Government procedures will guide-- and skew--investment decisions. Government agencies are unlikely to close themselves down when they're no longer needed. And, meanwhile, opportunities for patronage, corruption, and mistaken judgments abound--innumerable different ways to squander the investment intended to create wealth in poor neighborhoods. Though the new hybrid approach to poverty is a clear improvement over Great Society liberalism, it may also reenact many of the failings of that earlier era. That, certainly, has been Harlem's experience over the past few decades.

A mere three or four subway stops from midtown Manhattan, Harlem has long been an economic world apart. Racism and fear of crime prevented outsiders from investing; lack of access to capital weakened black entrepreneurship; and, even in the best of times, the neighborhood was a business backwater-- short on retail and largely without industry. Then, during the '50s and '60s, politicians with a big new idea began to make things worse. A generation of black elected officials--Representative Adam Clayton Powell Jr. and local Democratic leader J. Raymond Jones ("the Harlem Fox"), among others--pinned Harlem's economic hopes not on investment but on federal antipoverty programs, which, instead of spurring growth, ended up mostly stifling it. Urban renewal projects took over large swatches of land and razed them, but, bogged down by political wrangling, they often failed to construct anything new. And, without other market activity to point the way, downtown investors ignored the neighborhood, even as racism ebbed. "Over time," explains veteran nonprofit investor Kathryn Wylde, "the government displaced the private sector and destroyed any semblance of a free-market economy."

The political stranglehold on the neighborhood was institutionalized in the early '70s with the creation of the now infamous Harlem Urban Development Corporation (hudc). Meant to funnel government funding into the area, hudc functioned instead as an all-but-prohibitive gatekeeper, spending more than $100 million over 20 years with almost nothing to show for it. Much of the money was squandered on patronage--consultants, payroll, administrative overhead, campaign phone banks, and four-times-a-week car washes for top personnel. But even more destructive, in the long run, was the way the group managed to block both public and private development above 110th Street.

Using their influence at hudc and a range of other uptown institutions, a coterie of politicians known as the Gang of Five--Representative Charles Rangel, businessman and former Borough President Percy Sutton, and former Mayor David Dinkins were the best known--controlled not only all antipoverty funds coming into the neighborhood but also the government-owned land, which, at the time, accounted for roughly two-thirds of Harlem. "Anyone who wanted to do business in Harlem had to go through them," recalls Randy Daniels, New York Governor George Pataki's chief lieutenant in the area.

Part of the problem was old-fashioned cronyism. Part was political self- interest: by definition, hudc's influence was greater on government projects, which strongly prejudiced it against private investment. But both were secondary to the coterie's economic nationalism: members wanted to attract development only if they could control it--only if it included black partners and did not displace poor, black residents. Over time this meant that virtually no business, private or public, was done in upper Manhattan. "If the hudc gatekeepers weren't playing a meaningful role in the project, if it wasn't their people, if they weren't getting a piece of the action, then it was better that nothing happened at all," one New York businessperson recalls, "no matter how beneficial it might have been for the people of Harlem." Even when other public agencies tried to build in the neighborhood, hudc called all the shots--who was hired, how the deal was financed, which developers were involved--and often derailed projects. "If you didn't want to use their people, you took your money elsewhere," a local official remembers.

It seems that everyone who knows the history of Harlem recalls at least one deal that was blocked or fatally delayed. One prime site at the corner of Lenox Avenue and 116th Street sat empty for 25 years. A proposed international trade center to be built on 125th Street ate up millions of dollars before the idea was abandoned. Meanwhile, Blockbuster Video waited more than two years to open a store, stymied by hudc officials who insisted that the chain find a minority partner. Throughout the '70s, '80s, and '90s, successive mayors and governors looked the other way--even as members of the Gang of Five allowed Harlem's assets, such as the legendary Apollo Theater, to deteriorate almost beyond repair. (Percy Sutton is now contesting a suit, brought by the state, claiming that his company shorted the theater $1 million in revenue even as Rangel and other Apollo board members failed to pay for minimal upkeep.)

Pataki dismantled hudc in 1995, and the revelations that have come out since have turned even local opinion against it. Old-style, militant nationalism is now a minority voice in the neighborhood. Though the ever shrill Reverend Al Sharpton criticizes his fellow minister, Reverend Calvin Butts, for allying with "downtown money" to build subsidized housing, and Harlem's leading newspaper, The Amsterdam News, complains that the new retail on 125th Street is a plot to gentrify the area, by and large the economic nationalism in Harlem takes a different, subtler form today. Still, it remains a major obstacle to development.

The neighborhood's new development model, so much like the one Clinton hopes to foster nationwide, is at once a radical break from the hudc era and a continuation of it. Harlem's bumper crop of new subsidized housing is a case in point. None of these units could have been built without private- sector involvement: private money and private contractors. But the process also required a new cohort of middlemen--gatekeepers, in their way not unlike the Gang of Five, mediating between uptown and downtown and deciding how private investment would be spent in the ghetto. Desperate to dispose of thousands of dilapidated ghetto buildings acquired through tax foreclosures, over the past 15 years the city transferred thousands of plots to large nonprofit organizations--the New York City Housing Partnership, the Local Initiatives Support Corporation (lisc), and the Community Preservation Corporation--that pooled investments from downtown banks and businesses and then collaborated with a new generation of indigenous community development corporations, or CDCs, to build or restore 30,000 units in Harlem. The result- -a transformation that has left its mark on virtually every block of the neighborhood--speaks for itself, and Harlem insiders unanimously say it couldn't have happened without the local development groups that mediate between the community and outside investors.

These CDCs are a strange species unnecessary in most other parts of the city. Many are church based. Some are led by prominent, semipolitical figures such as Reverend Butts, whose Abyssinian Development Corporation midwifed the $15 million Pathmark grocery store that opened in East Harlem this spring. In contrast to hudc, most of these newer groups work to assuage neighborhood fears about the impact of new development. They also navigate local political obstacles and attract public subsidies as no private entrepreneur could. Perhaps most important, they ease investor concern about wading into the uncharted waters of upper Manhattan--and, so far, every sizable project in the neighborhood has involved a community group acting as codeveloper. The danger is that the nonprofits' social agendas may ultimately skew the development process. They help decide, for example, just how expensive any new housing should be and, by extension, who should live in it. Perhaps most damaging, the CDCs only reinforce the idea that, alone and unaided, downtown entrepreneurs cannot make money in Harlem--not exactly a message that will encourage investors.

Over the past two or three years, the focus of Harlem development has shifted from residential to commercial. On paper, the long underserved neighborhood looks like a retailer's dream. New housing has brought in a wave of new residents with more disposable income. In many retail categories there is no competition, and 60 to 70 percent of residents routinely travel out of the neighborhood to shop. But, as with the housing revolution, commercial development hasn't happened spontaneously: apart from a few drugstore and video rental chains willing to hazard small outlets in the area, national retailers are still wary of the ghetto.

Today, yet another middleman, the congressionally mandated Upper Manhattan Empowerment Zone (umez), is working to change that. Not unlike the local CDCs, the zone organization is at once the answer to Harlem's economic problems (it has declared the neighborhood open for business and lured several high- profile retailers) and a continuation of them (it adds still another layer of bureaucracy to mediate--and inevitably skew--investment).

Unlike many other empowerment zones, which vary widely from city to city, the one in upper Manhattan is genuinely committed to a market-oriented approach. Rather than create a web of social services that would perpetuate Harlem's dependence on the public sector, umez seeks to spur a business boom fueled by both outside investment and indigenous entrepreneurship. Aiming to create 23,000 new jobs, the organization's first president, former investment banker and city official Deborah Wright, consulted McKinsey & Company to determine what kinds of businesses would do best in the neighborhood; she then set out to encourage them with seed loans and tax credits. (The zone's charter also permits it to fund some social services, but primarily those that enhance business skills and job readiness in the neighborhood.)

The problem is that the zone is a quasi-public organization, and it functions like a classic government bureaucracy. The former investment bankers on the staff don't just go out and look for deals; as in a city agency, they issue requests for proposals and then wade through a flood of paperwork. Unlike a bank, which can issue a loan in days or even hours, the zone sends its likely deals through a convoluted, two-tiered approval process, and most of the major community groups in Harlem, the governor, the mayor, and Rangel himself have absolute veto power. Approval can take from six months to a year--a wait that can easily kill a small business start-up. And even more damaging than the delay is the overtly political nature of the screening process.

One consequence of this politicization is that social services have fared much better than business start-ups. Another is what insiders bluntly describe as patronage, much of it directed toward the same groups that benefited during the hudc era. "Everybody on the umez board wants their boy or girl massaged financially," says one local entrepreneur. "Board members and friends of board members are always telling Wright to take care of Willie and Suzy, and nobody asks who can do the job the most cheaply or the best."

What's remarkable, given these handicaps, is just how successful the zone has been in transforming the economic climate of upper Manhattan. "They have changed the rules for doing business in Harlem," says downtown development lawyer Jesse Masyr. In marked contrast to hudc, Wright has successfully signaled to major investors that Harlem is a safe and profitable place to do business, even as she has allayed the community's perennial suspicion of outsiders. Still, even the zone's greatest successes have come with costs-- the inevitable costs of government involvement in the marketplace.

The biggest business success story in upper Manhattan is the Harlem USA shopping and entertainment complex scheduled to open at the end of this year on the prime spot where 125th Street meets Frederick Douglass Boulevard. In the early '90s, after nearly 20 years of fruitless prospecting, the CDC that owns the land teamed up with a downtown developer, Grid Properties, to attract investment. But, even then, Grid President Drew Greenwald recalls, " some of the things we met with were beyond belief. Unlike Scarsdale or midtown Manhattan, Harlem takes a lot of explaining in corporate America." The big break came in 1995, just as the empowerment zone was getting going, when the Disney Company decided to open a shop. Though the store is considerably smaller than most Disney outlets, the company's decision to sign a deal made the complex. Half a dozen other national retailers, including Old Navy and HMV, followed Disney, and before long the project was 75 percent leased--enough to convince Chase Manhattan to come through with an impressive loan. Still, even with Chase and Disney and a Magic Johnson movie theater in on the deal, it took an additional $11.2 million from the empowerment zone to complete the $65 million financing package.

The returns from the complex's first year or so will make or break investor confidence in Harlem. "It is going to prove the uptown market and prove it decisively," says Anne Habiby, director of research for the Boston- based Initiative for a Competitive Inner City. "It took some extra time and extra effort to put all the pieces of the deal together," concedes Chase Manhattan's Mark Willis. "But, if it works, the next one will be easier to put together-- much easier." Others, even those who have a stake in the project, worry that expectations may have spun out of control. "The whole thing is a big maybe at this point," warns one uptown entrepreneur, "a lot of ifs." For one thing, though the neighborhood is a low-income enclave, much of the retail in Harlem USA doesn't fit a low-income profile. Misjudging the customer base is a mistake any retailer could make, but the involvement of the empowerment zone, with its non-market investment criteria, has made this kind of error much more likely. "There's too much social engineering," says another businessman from the neighborhood. "Harlem USA, the Starbucks down the street--these people have conceptualized a middle-class Harlem that doesn't exist yet."

Even more dangerous, the Harlem USA complex is already having an effect on the nearby real estate market, increasing demand and raising rents along 125th Street--and this jump may have raised the cost of doing business in the area above what any retailer can recoup in profit. "It's one thing for Disney and Chase," says a Harlem businessman. "They can take a loss on a small store. They're up here as much for political reasons, anyway--to establish themselves with black consumers. But regular retailers look at it differently, and many of them are already priced out of the market."

It's a pattern of distortion that local players say they see elsewhere in the neighborhood. Though most uptown investors agree that some kind of incentives are still necessary to spur development, they also warn that the wrong sort of inducement can prove disastrous. "All too often," says one insider, "the city provides a subsidy of $3 million, and the cost of the project goes up by $3 million." According to knowledgeable Harlem residents, this is exactly what happened with the Pathmark that opened recently on East 125th Street. One person close to that deal claims that the supermarket could have been built at a fraction of its cost--but the developers, flush with low- interest loans and government money, chose to pay extra for the builder who got the contract. Meanwhile, these insiders say, the publicsector incentives that sparked the housing explosion have jacked up construction costs higher than an unsubsidized market can bear, and, now that the subsidies are shrinking, both contractors and builders accustomed to inflated profits are reluctant to take on leaner work.

The empowerment zone's second goal--to stimulate the growth of local business--has proved even more elusive than attracting outside investment. It is an article of faith among those promoting the new-markets approach that the large-scale projects in the 125th Street corridor will have extensive ripple effects, generating increased business for the small stores around them, and umez has spared no effort in assisting neighborhood retailers who might benefit from these opportunities. One of its first actions was to set up a sister program called brisc (Business Resource and Investment Service Center), which provides capital and technical assistance to local entrepreneurs. Also during its first year, umez created half a dozen loan funds and business-tutoring initiatives to help still smaller fledgling operations: home-based enterprises, mom-and-pop storefronts, and the like. Several of the local CDCs provide similar counseling and technical assistance.

The problem for all these initiatives is finding neighborhood businesses worthy of help. "The zone would have liked nothing better than to give its first $10 million to local black entrepreneurs," says one downtown investor who has worked extensively in Harlem. "P.S.: There aren't any." The massive middle-class exodus from the area has caused a fateful erosion of entrepreneurial energy. And over two years, despite a strenuous search for clients, brisc has helped no more than three dozen enterprises, all of them in business categories--small start-ups and neighborhood stores--that notoriously fail in record numbers. Concerned about creating dependency, officers at brisc and other loan funds say they do all they can to maintain " a private-sector mentality," rigorously screening applicants and placing conditions on the aid they give. Still, like any bank with a risky exposure, the new breed of planners has a stake in the entrepreneurs they help, and they don't like to see clients fail--for both emotional and financial reasons. Taken together, what all this means is that, in aiding local businesses, even more than elsewhere, third-way economic engineers don't receive the signals the market sends them. If the entrepreneur is black or the loan fund has gone out on a limb to help him, it doesn't really matter if his business is taking root and creating wealth in the community. The loan fund will stick with the business regardless.

The new Sterling Optical store at the corner of 125th Street and Malcolm X Boulevard is evidence of how this impulse to nurture start-ups can both help and hurt. A franchise owned by a team of black investors, Sterling Optical is the first shop in Harlem to sell expensive, brand-name eyeglasses, and, despite its seemingly middle-class orientation, it has reportedly done well since it opened last September. The people who run the store and its customers seem particularly proud that it is black-owned and operated. Elegantly designed and well managed, located on a choice corner of central Harlem, it is another hopeful sign that the neighborhood may really be open for business.

But the reality is more complicated. The original idea for the store came not from its owners but from Gary Hattem, an executive at Bankers Trust. Building on the model of the decade before--the housing success story--Hattem asked friends at several CDCs to suggest types of new retail that the neighborhood needed. Then, together, the banker and the CDCs scoured the community for local people who could run shops. The most original part of the idea was the franchise concept: "It's a unique opportunity," says Hattem, "to help people without the business background overcome their lack of experience. " The new eyeglasses store is the first fruit of this initiative. Clifford Simmons at the Abyssinian Development Corporation (ADC) found the six local investors: a group of old college friends, now professionals. ADC made the match with Sterling Optical. Bankers Trust and lisc, the nonprofit loan fund, financed the deal at well below market rate. Each of the six entrepreneurs put down a small amount of money; ADC kicked in the rest and then walked the investors through every step of setting up the business: hiring, purchasing, marketing, day-to-day management, and more. "Everybody held each other's hand, " recalls a proud Simmons.

In the short run, the outcome is exciting. But, in the long run, it's far from clear just what Bankers Trust and ADC have bought with their investment and their labor-intensive personal involvement. As long as ADC stands in the background, essentially running the store and guaranteeing its prospects, the franchise owners won't learn very much about the real risk and responsibility at the heart of launching a start-up. Encouraging as it seems for other Harlemites, in truth, the Sterling outlet is a Potemkin enterprise. The bank and the CDC behind it have succeeded in putting a black face on Harlem retail, and a few well-connected residents may make a little money as a result. But the program has done little to create a genuinely entrepreneurial mindset in the neighborhood. "They're not teaching people business habits or business attitudes," says a skeptical downtown investor with experience in Harlem. Instead, he complains, they're creating another generation of people who make a living off local authorities.

The past six months have been a difficult period for the Harlem empowerment zone. Bad blood between Pataki and New York City Mayor Rudy Giuliani made it all but impossible for the able and well-liked Wright to do her job. The mayor's on-again, off-again relationship with Butts didn't make things any easier, nor has continued legal wrangling between New York state and Rangel in the Apollo Theater lawsuit. In early spring, local papers got wind of a feud between Wright and the mayor's office, and she resigned in April, ostensibly for personal reasons. But then, last month, the cloud hanging over the agency seemed to dissipate, thanks to an unlikely truce between Giuliani and Rangel. The zone's board of directors met quietly and released $54 million for languishing projects approved in the past fiscal year, and, according to insiders, Wright's successor will soon be announced. Given the zone's symbolic importance in Harlem, this turnaround is probably a welcome development, but it will solve none of the fundamental problems slowing commercial takeoff in the area.

As far as anyone can see into the future, political circumstances in New York--both uptown and downtown--virtually guarantee the continued politicization of Harlem's economy. Part of the problem traces back to the city's stranglehold on much of the land. The Giuliani administration has made a determined effort to divest itself of these holdings, cutting its portfolio from 65 percent to roughly a third. But the process by which the Department of Housing Preservation and Development (HPD) returns the land to private ownership remains a nightmare for private developers: painfully slow, maddeningly bureaucratic, and--like everything in New York--politicized. "It can take two or three times as long to get to the construction stage," complains builder Drew Greenwald, "and that's if everything goes smoothly. It takes the city a couple of years just to pick a developer, and then, if the guy doesn't work out, the site goes back to the city. If they make more than one mistake--and they often do--it can take up to 10 years to turn over a site."

The city's arcane, multilayered system for public review of most construction doesn't help. Every development that requires a zoning change must be submitted to the local community board. That's a difficult gauntlet to run in any neighborhood, but it's especially arduous in Harlem, with its age-old suspicion of outside--i.e., white--investors. Politically sensitive city agencies often defer to the enclave's local leadership. "We go back to the community boards for approval even when we don't have to," explains an HPD official. And, for many projects, the community board is only the first step in the process. A big-box shopping complex planned for 119th Street by the East River is currently undergoing a seven-month-long public review that began with Community Board 11 and will go through the borough president's office, the city planning commission, the city council, and the mayor's office before any construction can begin.

Local officials in Harlem know full well the power they wield in this process, and even those who say they welcome outside investment seem to feel an obligation to put up some resistance. "The elected officials of this community are going to make sure that the people who have been here a long time are not going to be sold out," declares Councilman Phil Reed. "We negotiate with the developers. We try to be reasonable. But, if you come through here and think you're going to make a profit by ripping someone off, you'll have a gorilla up against you." Often, the local demands are no different than they would be in any neighborhood: for example, that the developer of a large shopping complex pay for new Astroturf in a nearby playground. But even Harlem's planners admit that, in some cases, the area's unwelcoming politics can be prohibitive for investors. "I've talked to entrepreneurs trying to do things in Harlem , and I tell them to contact the empowerment zone," says Richard Parsons, president of Time Warner and chairman of the umez board. "They say, 'God save me from the empowerment zone- -you get bogged down in all that political foolishness.'"

Though agencies like the zone and the CDCs that embrace a third-way agenda are slowly opening the door to outside investors, they have done little to challenge the public's unrealistic assumption that the neighborhood can be revitalized and yet remain otherwise unchanged. If anything, because of their political roots, the new planners have a stake in encouraging that illusion. But as long as they do--and as long as they let it guide their investment decisions--the economic change they seek is sure to be sharply circumscribed.

It would be easy for members of Congress pondering Clinton's proposals to misread the lessons of Harlem. The costs associated with government efforts to jump-start market activity in poor neighborhoods are all too obvious in black New York, and, in a perfect world, it would be better to do without government intervention. But we don't live in a perfect world, and there are reasons why markets don't spring spontaneously from the soil in places like Harlem and the Mississippi Delta. As Kathryn Wylde says of upper Manhattan, " the economy of the local community just isn't strong enough or attractive enough yet to support market-rate investment without some incentives." In circumstances like these, public-private solutions are needed to grease the way for capitalism, luring developers with tax credits and low-interest loans even as they prepare a commercial infrastructure and incubate a local business culture. But, in the end, devotees of the public-private model have to recognize that their methods may undermine their aims. The challenge for both Clinton and Congress is to design programs that minimize bureaucracy and political interference, leaving the market as free as possible--not so much for ideological reasons but because in the long run, only genuinely market- based investment will take root and connect places like Harlem to the mainstream economy.

© 1999
The New Republic

About Tamar Jacoby: articles, bio, and photo



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