New zones of illusion

WASHINGTON has responded to the violence and looting in Los Angeles with a five-year plan for 'enterprise zones'. Is this really the way to go? Does it make sense to resolve the poverty, illiteracy and decay of inner- city America with a New World version of Docklands that will allegedly create wealth and jobs in a place where few private companies naturally want to be?

How does a country or a company create sustained growth from a landscape of racial isolation, poor education and social values on the verge of collapse? This is the debate consuming United States policymakers as Congress revisits the 1960s and 1970s for solutions to growing unrest in urban America.

A week ago the US House of Representatives passed the first legislation, a pilot programme to lure investors to depressed economic areas through the creation of 50 enterprise zones over five years. The zones were proposed by the Bush administration. The primary backer was Jack Kemp, the US Housing Secretary.

But the dollars 5bn compromise programme passed by the House falls far short of the comprehensive urban policy initiative promised by President Bush and congressional leaders in response to the Los Angeles riots. The US Senate begins deliberations this month on similar legislation. Almost no one is happy with Washington's compromise resolutions.

What is really at stake is a broader, ideological disagreement over how deeply the federal government should become involved in America's cities. Should it be a hands-on or a hands-off role? The Bush administration favours a hands-off role. Two months ago, following the burning and killing in Los Angeles, it resurrected enterprise zones as the centrepiece of its urban policy. Just as Margaret Thatcher seized upon the 'trickle-down' approach to wealth distribution, President Bush is convinced new investment and tax credits will redress the inequalities suffered by the have-nots.

Democrats (and some Republicans) in Congress disagree. They favour a broader programme of large- scale investment in 'human capital' and infrastructure to reverse what they regard as the social neglect of the 1980s. Their proposals are designed to reverse the decrease in the federal government's role, which began in the early 1980s when federal funds were shifted from cities to states.

At the same time, there was a dramatic shift in the composition of government expenditures: capital investment in roads, bridges, new libraries and so on shrank from 43 per cent of all intergovernmental expenditures in 1961 to 19 per cent in 1990 while payments to individuals (for healthcare, welfare and so on) escalated from 37 per cent to 57 per cent.

This is the real story of shrinking job creation, in the opinion of the hands-on advocates. Government funds are now being used to put food on the table and to pay for subsistence housing rather than to create jobs and economic growth. 'The fiscal 1993 federal budget will for the first time in US history spend more than 50 per cent on the past and thus neglect investment in the future,' said Frank Shafroth of the National League of Cities, based in Washington.

So far, the only concrete result of this on-going ideological debate is the compromise House legislation. It contains elements of both plans and probably not enough of either. The dollars 2.5bn in tax incentives and a capital gains tax break for investors in the zones, favoured by Republicans, was eventually matched by dollars 2.5bn in social and crime services in the zones, favoured by Democrats. Even supporters such as Mr Kemp said the compromise fell short of what was needed in blighted US cities. Estimates range as high as dollars 50bn over the longer term.

The real problem with enterprise zones is that policymakers tend to seize upon them as a panacea of problem resolution when they are only one component. Indeed, their track record is very uneven. Consider the Joseph Oat Corporation, a 'success story' in an enterprise zone in Camden, New Jersey.

Spurred on by a state sales tax break of about dollars 150,000 for material and equipment over the past seven years, Joseph Oat has invested dollars 1.5m in a run-down shipyard which has been transformed into a modern, metal fabrication plant. Employment has tripled to 150 workers who earn, on average, about dollars 15.50 an hour.

There is no question that the enterprise zone benefits sparked the Joseph Oat expansion in a blighted region. However, none of the poor people in the area actually work at the plant ('We are welding equipment for nuclear power plants, not making lawn furniture,' explained the plant manager) and less than half the workers live in Camden. The result is that total employment has increased but Camden's hard-core unemployed have been largely untouched.