Minority Businesses Need Capital to Thrive
Jan 18, 1999
Publisher: The Los Angeles Times

The Los Angeles Times

Behind all the good news about the economy lies a dismaying truth: Millions of hard-working Americans have not shared in the fruits of the longest boom in the country's history. Aggregate growth has failed to mitigate growing income and wealth polarization. Inadequate growth shared unequally will not keep economic growth alive. So when President Clinton, Treasury Secretary Robert Rubin, Commerce Secretary Bill Daley and hundreds of Wall Streeters gathered in New York at the invitation of Rev. Jesse Jackson, they were advised to avoid the ineffectual gestures that have dominated discussions of minority economic participation over the past decades.

As Jackson is fond of saying, "Capitalism without capital is just an 'ism.'" The political and social franchise that was the core of the civil rights movement in the 1960s can be secured only by expanding the economic franchise. Simply put, more equity and the means to finance it are needed for minority entrepreneurs, managers and employees. Only then shall we be worthy stewards of Martin Luther King's dream.

The time is ripe for post-partisan policies that will address this issue. Recognizing and defining what might appropriately be called America's domestic emerging market would be a good start. Having proved that they can lose billions of dollars in now submerging markets thousands of miles away, Wall Street and Washington ought to look more closely at the potential of this largely invisible market. Minority communities represent one of the most potent demographic and potentially economic forces in the American economy.

By the middle of the next century, Latinos, Asians, blacks and Native Americans together will constitute 50% of the population. Yet, in terms of economic independence, they still fall desperately behind. Today, minority groups are 26.2% of the population but own only 11.6% of the nation's businesses and receive only 6.2% of total sales.

The die has hardly been cast, though. Thanks to increased college attendance, millions of educated and managerially experienced minorities began entering the labor force in the late 1960s and are coming of entrepreneurial age. Despite enormous challenges, recent trends show that, overall, minority-owned businesses are growing at double the rate of all firms in the U. S. economy, both in numbers of new firms and impact on markets. Today, minority-owned businesses have revenues of $265 billion, with sales growing at close to 11% a year.

Not surprisingly, minority-owned firms are more likely to employ minority workers and thus provide an important entry point into the labor market for African Americans and Latinos whose frustrations are the sorrow of our cities.

The subtext to decades of debate over policies toward minority business is that African Americans and Latinos can't make it without subsidies. In fact, research strongly supports the opposite conclusion: Business owners with equal access to capital, education and managerial experience succeed at the same rate, regardless of ethnicity. Race is thus irrelevant if the rules of the game in the marketplace are scrupulously followed.

To their credit, state and federal governments have taken practical steps to close the racial gap in education and training. But they have been far less mindful of the need to increase minority access to capital.

The private capital market underserves minority businesses in the following ways:

  • There is a lack of credit information and resulting misperceptions that all minority businesses are small, unprofitable and unfavorably located. There is an overdependence on bank lending, resulting from poor access to alternative sources of capital.

  • The government fails to recognize that tough regulation of credit standards designed to protect the solvency of banks effectively redlines minority businesses. For example, minority businesses are significantly more likely to be denied bank credit and, when successful, receive smaller loans relative to comparable non-minority businesses.

  • New financial technologies have not been mobilized to supply the growing minority demand for credit and equity.

What can be done? Stop redlining minority businesses and create incentives that will encourage new enterprises. Carving new channels of capital that will flow to that sector will allow it to flourish.

Dr. Glenn Yago is Director of Capital Studies at the Milken Institute. The views presented here are his own.