Benton Harbor Map 1870

In a recent New York Times magazine article on the state of affairs in Benton Harbor, Jonathan Mahler wrote a fascinating report on how one de-industrialized town in Michigan is trying to alter its trajectory after 30 years of economic decline. The story focuses on the recent development of a Jack Nicklaus golf course, Harbor Shores, largely on the site of demolished Whirlpool factories and other former industrial plants.

When first settled by French traders in the 17th and 18th centuries, the area that is modern-day Benton Harbor was a marshy area at the confluence of the St. Joseph and Paw Paw rivers where an abundance of wild rice grew. In addition to beaver pelts, the Miami nation that lived in the area traded a wide array of hedge fruits and vegetables. Southwest Michigan, historically, was the great provider of food and produce to growing communities throughout the region.

From the 1850s until the 1970s, Benton Harbor became the industrial heart of Southwest Michigan. In the 1860s, industrialists dug a mile-long canal into the heart of the growing city to serve the growing number of factories and the then-huge fruit processing and exporting market. Auto parts and metal forging replaced food as the town’s principal activity.

In 1911, the forerunner of Whirlpool was founded in Benton Harbor by the Upton brothers, local entrepreneurs. In 1948, anticipating that the town might not return to World War II levels of economic activity, they formed The Whirlpool Foundation with the stated goal of ensuring that the company maintained its focus on the future of Benton Harbor and its outlying areas. Members of the Upton family still live in the area and one grandson is its long-standing Congressman.

The creation of Harbor Shores is a direct result of the Upton brothers’ vision in 1948. It is a step toward recreating Benton Harbor using the assets that come naturally to it. In the case of Harbor Shores, this is the beautiful scenery along Lake Michigan, an aspect of the community long-ignored as it followed its industrial destiny. As Jonathon Mahler points out in the New York Times Magazine, taken alone, Harbor Shores does not solve the area’s difficulties:

“In the short term, Harbor Shores could be a tough sell to developers. Plans for a water park have already been jettisoned, and no hoteliers have expressed sufficient interest to build there yet.

Long-term, though, Benton Harbor’s future as a tourist town seems foreordained. Harbor Shores is well under way, and in any case, what are the city’s other options?

In between Harbor Shores’ champions and detractors are a lot of people who question the wisdom of pinning the town’s hopes on a golf course but who acknowledge that something is better than nothing.

Harbor Shores is not without precedent. Recently, a golf course helped revive a troubled neighborhood in Atlanta known as East Lake. But at this point, it seems more likely that Harbor Shores will simply bring a new population to Benton Harbor and hasten the town’s fracturing into two distinct communities: the second-home owners and Whirlpool executives who live inside Harbor Shores and frequent the Arts District — and everyone else.

The question is, can “everyone else” include a stable, working-class population, or is Benton Harbor beyond repair?”

Benton Harbors “other options” and the region’s future prosperity, including job growth, depend on taking advantage of the area’s other natural assets. Aerial maps from 1870 show Michigan’s famous orchards and produce farms butting right up against Benton Harbor’s boundaries.  Chicago would not have been fed in the late 19th and early 20th centuries without Southwest Michigan’s extraordinary climate, water resources, topography and soils.

These attributes may well carry the seeds of the area’s next step along the path to further regeneration. The re-creation of sophisticated food processing, advanced agriculture and agri-tourism businesses can feed directly into the burgeoning local food movement in a 26 million-strong consumer market within a three hour drive of Benton Harbor. The area’s economic vitality can be boosted and jobs at all levels can be created through the development of new agricultural-related businesses.

The principles of sustainability are normally thought of in terms of recycling, environmentally sensitive use of resources and reducing our carbon footprints. But for smaller cities in the United States the list of ingredients is not nearly so simple.

I believe that failures in urban policy and private sector investment parameters since the 1930s have adversely impacted the economic development trajectories of thousands of smaller post-industrial communities across the US, particularly in the Northeast and Midwest.

There are more than 12,000 communities with populations of 15,000 inhabitants and about 950 with more than 50,000 but fewer than one million inhabitants.

Smaller communities tend to have fewer resources and are less likely than larger ones to be able to reinvent themselves. Innovation and reinvention are critical factors in continuing growth in communities. Economic health in communities will also reinforce the creation of social safety nets that go beyond government programs.

Even as the demand on services in smaller communities rises with unemployment, low inventories of affordable housing, the criminalization of significant parts of the population, lower local tax revenues and a multiplicity of small, highly specialized taxing jurisdictions make responding to those demands more and more difficult. Cities are the first entities to have to face social change (such as homelessness, returning prisoners, food deserts, declines in available affordable housing, welfare dependency), but cities, especially smaller ones, do not have the taxing or spending power to be able to do much about it.

There has been plenty of research on larger cities – New York, Chicago and Los Angeles have generated libraries of academic, political and social research. Larger cities also tend to attract more private sector and foundation resources intended to repair social dislocation. But, relatively little has been done to consider the best strategies and responses of smaller communities.

How have thriving smaller cities achieved that success? What other factors need to be considered with smaller cities? What lessons can be drawn from larger communities? How far are these lessons applicable?

One set of answers revolves around planning for a material change in economic activity, relying as far as possible on leveraging local or regional strengths and being prepared to develop and sustain a variety of new businesses, the kind most likely to develop the highest rates of job growth.

In coming posts, I will consider the economic history of one such town, Benton Harbor, Michigan. I will consider how it came to be a vibrant industrial and food processing center. I will also look at why and when it fell from grace and why I believe that it has the ingredients to show the way forward to many other small- and medium-sized communities. In doing so, I will develop a roadmap for bringing capital to new business ideas in that community.

photo credit: Alter Ego by Shane Gorski via CC

I grew up in South Essex in England in the 1950s, on the north bank of the Thames estuary. The first homes I lived in were built right after World War II to accommodate refugees from the bombed-out communities in east London.

After the war, the region went back to refining oil, manufacturing petrochemicals, building cars, making paper, importing goods from Britain’s shrinking Empire, processing liquid natural gas imported from North Africa and making cement. The area was an industrial and logistical Nirvana. Our neighbors worked for Ford, Shell Oil, Thames Board Mills and Blue Circle Cement.

It was a solidly blue-collar community where everyone earned their living from heavy industry. When we saw Ford workers painting their houses, we knew, even without reading the paper, that their two-year contract was being renegotiated and the unions were using the leverage of a strike to get the best deal.

Then and now

Today the docks are gone, replaced by a massive development of offices, shops, apartments and townhouses. Canary Wharf is London’s newest financial center. Freight is now handled primarily in containers through Felixstowe, a port on the North Sea that in the 1950s sheltered fishing trawlers.

The Ford works no longer smelts iron ore in a turnkey manufacturing operation. It assembles cars using parts that arrive from Liverpool, Wales, Belgium and Germany. It employs only about 10 percent of the people it did in 1950. Now the limestone quarries being used to feed the cement works in 1950 are a massive shopping center, drawing shoppers from all over South East England. The oil refineries, chemical plants and petro-product terminals all employ a fraction of the people that they did in 1950.

You could write a similar history of industrial decline in northeast Illinois and northwest Indiana. But in South Essex you do not find the community devastation seen in East Chicago, Gary, Hammond and Whiting. Instead the entire region has retooled itself to meet the needs of the service industry.

A labor monoculture

The very factors that made America so successful in the 19th and 20th centuries now make it difficult to reestablish economic expansion. Industrial growth centered on the creation of very specialized communities, often dominated by single families and companies. This concentrated the skills needed by the community. Successive generations followed one another into the same plants. Immigrants moved to growing towns and cities to meet the labor needs of expanding manufacturers. Many towns today suffer from skills sclerosis caused by that same specialization. The flexibility offered by the multiplicity of small communities has become a cat’s cradle of intersecting and duplicative municipal entities. Berrien County, Michigan with a population of only 162,000 has 49 distinct taxing jurisdictions.

In the 20th century, an array of federal housing regulations and subsidies fed the growth of the construction industry and the creation of suburbs. Compared to other developed countries, the US has a larger proportion of its population locked into owned property, property that is declining in value. Its vaunted labor mobility suffers as a result.

Companies slowed or stopped providing components of the welfare safety net after 1933 and many were acquired by larger businesses from out of state. As companies were closed, acquired or the founders moved on, that element in the “population” of a community (i.e. the closed or merged company) was denuded.

The way forward

In combination these two issues have diminished the commitment of many companies to the communities with which they originally grew. By identifying these challenges the path to economic growth becomes clear:

• Create new businesses that depend on the region’s natural strengths.
• Concentrate educational resources on developing excellence in the skills needed to support the region’s business.
• Develop collaborative regimes involving the government, the private sector and the local community to care for community issues.
• Encourage a more regional concentration on available strengths
• Unify elements of government to address 21st century needs.
• Innovate constantly to ensure that communities continue to leverage their strengths and develop appropriate skills.

The Midwest is not South Essex. When we see how communities in different countries and cultures have handled change, we should always ask ourselves “how?” and “why?” The answers can help us develop solutions to our own challenges.

Photo credit: estuary sunset by Dan Davison via CC

One of the most daunting challenges facing someone ready to develop a new business is where to get the capital from. It is hard enough for companies that are already up and running.

In a December 28 story from the Chicago Tribune, one business owner reports:

“Even with federal contracts in hand, it took [Lynn Sutton’s] company, Kairos Consulting Worldwide, about 18 months to secure loans that would help the Loop-based business manage rapid growth from U.S. Navy and Energy Department contracts.

An industrial engineer by training who formerly worked for Kraft Foods Inc., Sutton helps clients improve efficiencies in their operations, from fixing payroll data inaccuracies for a human resources department of a large company to improving warehousing and procurement procedures for government clients. She has 12 employees and works with about 20 outside consultants on a project basis. The company’s revenue went from $500,000 in 2008 to $2 million in 2010, Sutton said.

At one point, “I had $1.5 million in contracts in hand, but the banks wouldn’t lend against those contracts,” Sutton said.

She asked a former client to co-sign one round of financing and went to the Community and Economic Development Association of Cook County for a small loan, she said. She also asked vendors to stretch payment terms from 30 to 45 days.

“We couldn’t explain the rapid growth in the terms (traditional lenders) wanted to see,” she said. “All the banks wanted to see a revenue history. I said, ‘I don’t have time to get a history, I have a contract.’”

Traditional lenders have to conform to hard-wired lending practices overseen by the supervisory authorities. The need for historical data (which the greenest of investors knows is no guarantee of future performance), is really the only auditable way the industry has been able to come up with as a predictor of some measure of success. It provides the lender with a rear-view mirror assessment of the business owner’s skills. The challenge is, you’ve got to build up that history first.

Lenders rely to such a great degree on borrowed money themselves that they cannot afford to make many mistakes. Lending officers do not have the time (or the training) to be able to assess young businesses in detail. That would potentially involve sitting with a business sponsor for months to develop an adequate understanding of the issues faced by his or her business. Is this sponsor capable of making sound judgments?  Are they committed to and passionate about their vision? Do they have or can they assemble a first-class management team?

The capital markets need to come up with a solution to this gap in the market. Perhaps markets should borrow from the experience of tech-rich business incubators as a way of filling in this gap. An incubator develops an in-depth understanding of each business it assesses and nurtures. One of the results is that the investor becomes as close to the business sponsor as “Family and Friends,” the traditional last resort for capital for a new business. It probably means that the new business owner has an equity partner from the outset, but the incubator process can smooth the way to constructing an appropriate balance sheet so a new business can flourish more quickly.

photo credit: Ruben Alexander via CC