OPPORTUNITY ZONES, COLLABORATIVE CAPITALISM, AND COMMUNITY BANKS: A PROPOSAL.

• Author: Dyal-Chand, Rashmi
• Position: A Taxing War on Poverty: Opportunity Zones and the Promise of Investment and Economic Development

Introduction 1227 I. Collaborative Business Networks in Opportunity Zones and the Value Added by Community Banks 1228 II. Regulatory Reforms to Harness the Power of Community Banks 1235 Conclusuon 1243 INTRODUCTION

This Essay proposes a very specific strategy for leveraging Opportunity Zone (OZ) funding to alleviate poverty, limit the harms of gentrification, and support the expansion of income-generating opportunities in OZs. The strategy builds on important work in urban cores that has been ongoing for decades. Briefly described, this Essay proposes significantly greater regulatory and programmatic support for community banks to leverage OZ funding to support local business networks. Part I of this Essay describes the importance of local business networks as drivers of poverty alleviation and economic development in urban cores, a good number of which have been designated as OZs. Part I argues that OZ funding should support such networks, and further that community banks have the potential to play a uniquely powerful role in these efforts. Part II of this Essay proposes a regulatory approach for enhancing opportunities for community banks to fulfill this potential.

At the outset, it is important to state a core assumption underlying this Essay that I and others have elaborated elsewhere in broader discussions of poverty alleviation and economic development. (1) The assumption begins with the recognition that the goals and strategies for poverty alleviation and local economic development can and do regularly conflict. It also acknowledges that the OZ program and predecessor programs such as the Clinton-era Empowerment Zones program may well have articulated the coequal prioritization of both goals, but that in practice they have prioritized economic development. (2) By contrast, this Essay assumes that it will be necessary for the OZ program to explicitly prioritize poverty alleviation above economic development. (3) This Essay's focus, therefore, is on programmatic and regulatory reforms to the OZ program that enhance its ability to alleviate poverty in areas designated as OZs.

1. COLLABORATIVE BUSINESS NETWORKS IN OPPORTUNITY ZONES AND THE VALUE ADDED BY COMMUNITY BANKS

   Despite the newness of the Opportunity Zone program, there is already a growing consensus that OZ funding is not currently reaching those who most need it and would benefit from it. (4) This is because, as presently structured, OZs are too indirect a mechanism for poverty alleviation. They rely too much on the assumption that investments in larger businesses without direct ties to neighborhoods designated as OZs will spread the benefits of those investments to local residents. (5) In reality, according to a mid-2020 report:

   Almost 97% of the more than $10 billion raised by opportunity funds so far has been raised by funds focused on commercial or residential real estate.... Much of that money likely will be spent on projects that have been in the works for years and have a high expected return, such as high-end apartment buildings. (6) A recent, detailed analysis by Michelle Layser supports this conclusion. (7) Analyzing data from the New Markets Tax Credit (NMTC) program, Layser concludes that both the NMTC program and the OZ program will likely produce "inefficient and inequitable" outcomes, often because they invest in gentrifying neighborhoods. (8) In short, the OZ program assumes too much that beneficial spillovers will occur from investments tied only to geography. (9)

   Reports such as this indicate that it is imperative that the OZ program be reformed to provide substantial investments directly to the long-time residents of OZs. Furthermore, such financial investments must include investments not only in housing but also in the development of local jobs and other income-generating opportunities. While affordable housing is crucial, the OZ program (like the Enterprise Zones and Empowerment Zones programs before it) must play a significant role in providing long-term financial support for the development of stable, income-generating opportunities. (10) In particular, as has been argued elsewhere, by supporting small, local businesses started and owned by local residents, such programs can provide deep systemic support for the creation and maintenance of local jobs, career ladders, and local business ownership. (11)

   Given its limitations as a tax benefit program, it is good news that OZ investments do not have to be made on a blank canvas. The primary task of the OZ program need not be to find market opportunities and support the creation of new businesses or business clusters. Successful small businesses already exist in urban cores across the country. (12) However, while some of these businesses have been successful for decades, most are under-capitalized. In a recent book, Collaborative Capitalism in American Cities: Reforming Urban Market Regulations, I used a case study methodology to examine such businesses, focusing in particular on what I termed "collaborative business networks." (13) Collaborative business networks, which exist in many OZs, could certainly benefit from financial investments. Thus, a highly efficacious use of OZ funding would be to target such networks with long-term financial investments. To develop this argument, it is important first to describe such networks more fully and also to consider why they are particularly well-suited to poverty alleviation efforts.

   While collaborative business networks vary widely in their structures, industries, locations, and other characteristics, there is a clear pattern in their approach. As I wrote in the book,

   The most important commonality is that the ventures involve networks of businesses that collaborate with each other. Their collaboration typically entails the sharing of key resources--such as training and vocational education, labor, financing, market data, suppliers and supplies, management expertise, and physical space--as a means of reducing costs for the network as a whole and for each business in the network. The sharing also typically makes use of local ties to instill a strong connection to a local community. Often this means that the businesses in the network have multiple "bottom lines." And the sharing within these networks consistently produces long-term, stable income for the workers. (14) In particular, collaborative business networks have six defining features. (15) While all of these criteria seem critical to the operation and success of collaborative business networks, they do not necessarily constitute an exhaustive list. The first three criteria describe the particular form of collaboration of these networks. First, businesses involved in collaborative business networks typically share extensively within a closed network that operates in a discrete market, defined both geographically and by industry or market sector.+ Within this literal and figurative space, the businesses involved in the network act in a coordinated or collective manner. (17) They share a great deal of information and other resources that each business would typically have to acquire and manage on its own, but the businesses instead share within the entire network. (18)

   A second core feature of such networks is that they involve one or more institutions that serve as the glue among the businesses, helping them to share and to act in a coordinated manner." Regularly such institutions, which include local nonprofits, unions, and financial institutions, act on the collective behalf of the small businesses. They also regularly support the ability of such businesses to prioritize goals beyond profit making.

   The third feature, which also fundamentally defines the form of collaboration, is that the businesses within the networks coordinate in a way that lowers their individual costs of doing business. (20) They also regularly manage risk in a coordinated manner. (21) Again, by doing so, they externalize to the network as a whole the costs and risks that each individual business would otherwise bear. It is reasonable to expect that this behavior has helped many of the businesses involved to perform better than they otherwise would have, including by surviving for longer than the average start-up small business. (22)

   The other three core features of such networks are not definitional of the form of collaboration, but rather seem crucial to the success of these networks in alleviating poverty, providing stability to their workers, and even spurring stable economic development in urban cores. The fourth feature is that the businesses involved in these networks seem to prioritize goals other than, and in addition to, profit making. (23) These goals can include poverty alleviation, local hiring, worker democracy, environmental sustainability, neighborhood revitalization, and other priorities. (24) The explicit prioritization of these multiple bottom lines seems to drive many of the decisions of these businesses, including at times by providing an incentive to share.

   The fifth feature is that the various stakeholders in the businesses...