TJP

Exchange is Essential for Economic Growth

Byron A. Ellis

October 15, 2007

A key component of economic growth is economic exchange. Economic exchanges are voluntary transactions between negotiating parties. Generally, efficient exchanges, or markets, require an organizational infrastructure and entities to enforce infrastructure processes. If the infrastructure is absent transactions will be costly or non-existent.

Many central cities lack the appropriate economic infrastructure. As a result, per capital sales is low. Per capital retail sales can be used as a proxy for measuring economic exchange.

Generally, economies with high per capital retail sales have higher per capita income than economies with low per capita retail sales. For instance, the 2002 per capita retail sales revenue for Baltimore City ($5,145) and Philadelphia ($6,117) was lower than Harford County Maryland ($10,755). In 2002 income per capita for Baltimore City ($26,088) and Philadelphia ($26,369) was also lower than Harford County’s income per capita ($33,249).

Low per capita retail sales indicates that economic exchange is limited. It is also indicative of a less than desirable economic infrastructure. The economic infrastructure is contingent on the strategy government leaders and citizens implement. Government leaders are responsible for facilitating a climate whereby citizens can create vibrant economic exchanges.

Good economic infrastructure requires good governance, facilitation of investment in tangible assets, such as buildings, equipment, and inventories, as well as in intangible assets, such as training, education, healthcare, and job mobility. Good governance also requires the facilitation of financial markets for the efficient allocation of savings.

Efficient financial markets are necessary for the production and exchange of goods and services. Financial markets, in the broadest sense, are institutions and processes that facilitates smooth transactions between buyers and sellers of financial instruments (Bonds, stocks, notes, etc.).

The savings (income less expenditures) of economic units creates financial assets. Thus, leaders of central cities must ensure that financial assets created are invested within the community. If community savings are invested elsewhere, individuals within the community will not be able to produce enough goods or services to develop vibrant markets and improve standards of living. As a result, they will experience low per capita sales and low income.

The problem that low-income communities confront is one of allocation and distribution. That is, how do communities with low sales per capita use their financial assets and citizens to produce goods and services, and how are the goods and services distributed among community residents?

If we look at an inner city economy from a simplistic point of view, we can assume that it is composed of labor and capital. Therefore, to produce goods or services, some amount of capital must be combined with some amount of labor. Additionally, to be suitable for trade, the goods or services must increase customer satisfaction.

In most central cities potential labor is underemployed and investment capital is scarce. Moreover, many potential employees lack the requisite skills to produce goods and/or services that will increase customer satisfaction. Hence, often the appropriate combination of labor and capital is unavailable.

The Skill Gap

Skill refers the expertise developed through training and experience. A skill gap is the difference between the elements required to perform a given task and the actual performance. Skill shortages affect the ability of communities to allocate employees in the production process. It also inhibits individual entrepreneurship.

Individuals and communities overcome the skill gap through collaboration in the areas of savings, training, education, and networking. Some communities and individuals, however, are not familiar with the benefits of collaboration. As a result, they do not engage in high level collaboration and are unable to reap the benefits of the exchange process.

Communities and individuals that fail to collaborate are more prone to exhibit individuals with pronounced skill gaps and destructive behaviors.

Collaboration in central cities should be a key goal and should include public-private partnerships, and a good understanding of property rights.

The Investment Gap

The investment gap is the difference between available savings and required investment. In some cases, central city community savings may be sufficient to satisfy the required investment, but it may not be under community control. Therefore, it is important for central cities to control financial institutions. Efficient financial institutions and markets are essential for capital formation and economic growth.

Because residents of many central city economies, such as Baltimore and Philadelphia, do not control financial institutions, their investment behavior is greatly restricted. Moreover, external misperceptions of residents’ capability often affect their ability to secure financing. Therefore, if they wanted to invest in tangible assets, they would have to save and use their own funds to do so. However, if tangible purchases were larger than their savings, such purchase would have to be postponed.

Investment and technological progress are essential keys to success in the market place. The economy of central cities, as well as, many developing and transitioning economies have had difficulties attracting investors and gaining access to technology.

Strategies to Consider

It is important for low-income communities to have good governance. Thus, the vision of their leaders should be broad and inclusive; resources, particularly citizens, should not be left underutilized. Additionally, leaders should develop a strong public-private partnership and should embark in a genuine attempt to train community residents, even the imprisoned, and to inculcate the benefits of collaboration. Finally, they should ensure the availability of viable community based financial institutions.