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UNDERSTANDING THE RIOTS PART 5 : THE PATH TO RECOVERY : ECONOMIC RENEWAL : Out of the Ashes: Start Small to Rekindle the Future

May 15, 1992|Joel Kotkin and David Friedman | Joel Kotkin, a contributing editor to Opinion, is a senior fellow with the Center for the New West and international fellow with Pepperdine University School of Business and Management. David Friedman is a research fellow in the Massachusetts Institute of Technology Japan Program and counsel of Tuttle & Taylor.

In the understandable rush to "rebuild" the riot-scarred sections of South Los Angeles, we may be in danger of ignoring the more fundamental challenge of constructing a sustainable and prosperous regional economy. Only this larger goal can possibly provide the upward mobility for the vast majority of African-Americans, Latinos and Asians seeking job opportunities, while generating the resources necessary to help an underclass whose needs aren't answered by economic opportunity alone.

The riots force Los Angeles to confront two alternative economic and social futures. In one scenario, perhaps now at hand, a weakening economy ensnares more and more of the African-American community, as well as Latino and Asian immigrants. With many whites and middle-class minorities fleeing to the suburbs and beyond, the city of Los Angeles would come to resemble once economically vibrant, now chronically depressed cities like Detroit.

But there is another scenario: The city's diverse and talented populations begin to construct new industrial communities powered by smaller manufacturing firms. Attracted to the unmatched resources of the region's huge manufacturing base, foreign and domestic companies boost their investments as they help to shrink the underclass through public investment and opportunities for self-help.

Viewed from this perspective, L.A.'s economic future will be determined more by the creation of small-firm industrial communities than by attempting to rescue a relatively small, largely dysfunctional underclass. Opening stores and concocting schemes for enterprise zones in the heart of the ghetto constitute only a small part of reshaping the region's industrial profile.

The idea that smaller manufacturing firms can drive an industrial renaissance in Los Angeles is not a fantasy. Its origins already exist in the enormous variety of small manufacturing companies that increasingly represent the most vital part of the regional economy. Indeed, before the recession set in, the crucial role of smaller companies in generating economic growth was clear in such industries as aerospace and electronics. Between 1988 and 1990, according to a Center for the New West survey, while companies with more than 100 employees shed roughly 10,000 high-technology jobs, an equal number of similar positions were created by firms with fewer than 100 employees.

The potential for further development of smaller manufacturing firms, and thereby opportunities for the emerging middle class, in Southern California are prodigious. Already, in numerous fields--aerospace sub-contracting, computer hardware and software, textiles, biomedical technology, and electrical components--the region is home to a collection of world-class producers and an unrivaled labor base, ranging from the highest levels of sophisticated technicians to eager entry-level workers.

Despite the fashionable notion of the inevitability of a "post-industrial" future for Los Angeles, smaller manufacturing companies stimulate the regional economy far beyond that of traditional service firms and offer generally higher levels of compensation, as well as upward mobility, for their employees. The majority of the small machine-shop owners in the 150-member American Manufacturing Network, for example, are immigrants who started out as unskilled help at other shops and, over time, acquired the technical skills and business acumen to go into business for themselves.

The central role of smaller, entrepreneurial units--often run by former factory hands--is a worldwide phenomenon. For example, between 1954 and 1985, the high-growth era in Japan, the value-added contribution of firms with fewer than 300 employees rose from 42% to nearly 60%, almost twice the United States. Today, these smaller companies employ roughly 75% of Japan's factory workers. Many large Japanese firms--Toyota and Hitachi, to name two--increasingly rely on these smaller firms, not only for most of their components but also for the innovations and designs that have resulted in such superb products as the Lexus.

Southern California possesses many of the same attributes that produced the spectacular economic boom in Japan. Like the Japanese work force in the early postwar era, which was undereducated but highly motivated, it enjoys a surplus of skilled and semiskilled workers--particularly Asian and Latino immigrants--eager to improve their lives and upgrade their skills. These demographics, as Japanese manufacturing consultant Kiyoshi Suzaki observes, give Southern California the edge over the Midwest, with its generally older, Anglo work force, and over Japan and Western Europe, which both suffer from a large shortage of motivated factory workers.

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