An important emerging market – in the U.S.
Martin Luther King, Jr., along with other great leaders of the civil rights movement like Bayard Rustin and A. Phillip Randolph, originally defined the 1963 March on Washington by the linkage between “jobs and freedom.” Freedom, they taught, always required linking the political and economic dimensions of democracy to create the requisite access to the means, methods and outcomes of achieving economic independence.
Since the turn of this century, the demographic drivers of the urban economy have shifted. Since 2001, more than half of America’s largest cities have had more African Americans, Latinos, Asian Americans, and other racial minorities than whites. Minorities now constitute the majority in nine of the largest U. S. cities. The current size of the Latino and African American consumer market is already larger than the GDP of all but nine countries in the world. Within the next five years, over 80 percent of the growth in labor force will occur among those populations still referred to anachronistically as “minorities.” Business formation rates are three to four times higher among small minority owned enterprises than white ones, yet their rates of return, growth rates and longevity continue to lag. Minority and immigrant businesses have concentrated in highly competitive, low-profit retail and service business lines clustered geographically. With attention focused mainly on place-based businesses and policy incentives, much of the economic growth potential of this important demographic shift remains unrealized. Business failures and low profitability are highest in these emerging “enclave” economies in cities of color.
Demographically driven markets that are emerging domestically share characteristics with cutting edge emerging markets abroad. Those overseas markets continue to define the emerging structure of the global economy by producing higher rates of aggregate GDP growth than the developed world. This structural shift of global demand hasn’t occurred since the New World surpassed the Old World in GDP growth in the first decades of the 20th century. In fact, domestic emerging markets have many advantages over those outside the U.S.: a significant supply of strategically located land, existing infrastructure, a pro-growth environment, a large concentration of underserved consumers, and labor. Yet, they suffer high rates of underinvestment. As Tim Bates and Alicia Robb detail in “Analysis of Small-Business Viability in Urban Minority Communities,” their updated analysis of this sector, these firms encounter higher borrowing costs, receive smaller loans, and see their loan applications rejected more often than comparable white-owned businesses. Although lower owner net worth, credit ratings, firm age, size and other risk factors account for some of the differences, studies consistently show that black and Latino owned firms with otherwise identical firm and owner traits and credit histories gain less access to bank credit than white-owned firms. Tight business credit markets since the Great Recession complicated things even further.
Since 2000, income inequality has increased in over two-thirds of metropolitan areas. Wage gaps have more than doubled from 12-32 percent. The costs of inequality limit growth. Since the 1970s, many economists have argued there was a trade-off between growth and equality. More recent research suggests that unless these emerging domestic businesses, consumers, and workers can be tapped for productivity gains, they will act instead as a brake on economic growth.
Thus, democratizing capital means overcoming the increasingly apparent costs of inequality. It means improving ethnic, racial and gender parity in labor force participation, business formation and economic ownership. It was always the right thing to do. Now it is the only way out of traps in liquidity, demand and macroeconomic forces that challenge a sustained, robust recovery that could put America at the frontier of linking domestic and overseas emerging markets.
Globally, firms that derive profits from emerging domestic demand growth are growing fast. Private and public equity investors have figured that global emerging domestic demand growth exposure is important for their investment returns (and for the long-term liabilities of U. S pensions). Now is the time for them to realize this at home as well in order for America to keep its global edge.