PPA786: Urban Policy
Class 20:
Financial Capital Programs to
Promote Community Development
PPA786, Class 20: Financial Capital Programs
• Class Outline
▫ Background (CDCs and Small Business)
▫ Types of Community Development Institutions
 Description
 Analysis of Impacts
PPA786, Class 20: Financial Capital Programs
• Background
▫ Institutional arrangements for community
development—and financing—are very complex.
 Many financing programs are affiliated with a
Community Development Corporation.
▫ The focus on financing activity is almost always on
small business.
PPA786, Class 20: Financial Capital Programs
• Community Development Corporations (CDCs)
▫ CDCs are non-profit, community-based organizations
that build housing, finance local businesses, and
occasionally run businesses themselves.
▫ They first appeared in the 1960s and have expanded
rapidly in size and numbers since.
▫ The got a big boost with the National Community
Development Initiative of the 1990s, which raised
hundreds of millions of dollars for CDCs from the
federal government, foundations, and businesses.
PPA786, Class 20: Financial Capital Programs
• Current Status of CDCs
▫ There are about 4,600 CDCs, created with state,
local, federal, and foundation grants.
 They create 86,000 units of housing per year.
 Advocates claim that they create 75,000 jobs per
year, but there is no evidence on displacement.
 Only about 20% of CDCs try business development,
but this number is growing.
PPA786, Class 20: Financial Capital Programs
• The Misleading Emphasis on Small Firms
▫ In our dynamic economy (outside a recession),
many new small firms appear every year.
▫ Many fail, but some succeed and grow.
▫ Early research, now discredited, said small firms
produced most new jobs.
▫ Even if small firms did produce most new jobs,
there is no reason to believe that jobs could be
created by subsidizing small firms in areas with
few resources and little business experience.
PPA786, Class 20: Financial Capital Programs
• The Inevitable Focus on Small Firms
▫ Nevertheless, community development efforts will
undoubtedly continue to focus on small firms.
 Community organizations do not have the resources to
attract large firms.
 Community development is a place-based strategy and
rarely looks into placing residents in existing large firms
outside the neighborhood.
▫ This implies that training and technical assistance are
almost inevitably part of any financing program for
community development.
PPA786, Class 20: Financial Capital Programs
• Place-Based vs. Person-Based Policies
▫ We do not attempt a comprehensive comparison
of place-based versus person-based strategies.
 But as discussed earlier, most human-capital
strategies are person-based.
 We do not have enough evidence to understand
which strategy deserves more money or which
strategy works best under various circumstances.
PPA786, Class 20: Financial Capital Programs
• Types of Community-Level Financial
Institutions
▫ Primarily for business development
 Community Development Financial Institutions
 Microfinance
▫ Primarily for consumer credit
 Community Development Banks and Credit Unions
 Savings Subsidies (Individual Development
Accounts)
PPA786, Class 20: Financial Capital Programs
• Community Development Financial institutions,
CDFIs
▫ CDFIs provide funding for low-income
communities.
▫ They can take the form of community
development loan funds, CDLFs; community
development venture capital funds, CDVCs;
community development banks; and community
development credit unions.
PPA786, Class 20: Financial Capital Programs
• CDFI Growth (Alperovitz et al. 2010)
PPA786, Class 20: Financial Capital Programs
• Federal Support for CDFIs (Alperovitz et al., 2010)
▫ In 1994, the federal government established the CDFI Fund in the
U.S. Department of Treasury. Funding levels have been limited:
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FY 2000: $118 million
FY 2005: $51 million
FY 2008: $94 million
FY 2009 $107 million
FY 2010, $246.75 million
▫ The funds for FY 2010 financed both the existing CDFI Fund
programs and a new “capital magnet fund” program for
affordable housing lending.
▫ The CDFI Fund reports that, in FY 2005, CDFIs leveraged each
appropriated financial assistance dollar from the CDFI Fund with
$27 in non–CDFI Fund dollars, leveraging $1.4 billion private
and non–CDFI Fund dollars with $51 million in CDFI funds.
PPA786, Class 20: Financial Capital Programs
• Evaluation of CDFIs
▫ Not much evaluation; no random assignment.
▫ These institutions are not self-supporting; they
require subsidies from the federal government
(through the Community Development Financial
Institutions Fund), foundations, businesses.
▫ Benefits they may provide: training, technical
assistance, investment opportunities in lowincome communities, new products, new jobs.
PPA786, Class 20: Financial Capital Programs
• Job Creation by CDVCs
▫ According to Rubin (2007), a trade organization
surveyed 38 companies financed in part by CDVC
funds.
▫ They found that these companies had added 4,335
jobs.
▫ They also found that most new jobs went to lowincome employees.
▫ But there is no analysis of displacement.
PPA786, Class 20: Financial Capital Programs
• Community Development Banks and Credit
Unions
▫ Many low-income areas lack bank branches.
▫ Community development banks (for-profit) and
credit unions (non-profit) have developed to help
fill this gap.
▫ They provide consumer loans, mortgages, and
business loans, as well as checking and savings
accounts and, sometimes, financial education.
PPA786, Class 20: Financial Capital Programs
• Impacts of Community Lenders
▫ These types of lenders have appeared in many
communities where lenders did not previously
exist; at the very least, this makes lending services
more accessible.
▫ There is anecdotal and survey evidence of benefits
(see Williams 2007), but no studies based on
random assignment.
PPA786, Class 20: Financial Capital Programs
• Microfinance
▫ Microfinance (or microcredit) programs provide
funds to small business enterprises.
▫ Microenterprise programs may also add training
and counseling.
▫ There are now over 500 microenterprise, mainly
microfinance, programs in the U.S.
PPA786, Class 20: Financial Capital Programs
• History of Microfinance Programs
▫ Microfinance started in developing countries.
▫ A loan would be given to one member of an
organized group; the other group members would
apply social pressure to make sure the loan was
paid (and perhaps help with the payments) and
offer advise and assistance—until it was their turn!
▫ This approach proved to be very successful in
many settings, particularly for women.
PPA786, Class 20: Financial Capital Programs
• Microenterprise/Microfinance in the U.S.
▫ Many microenterprise development organizations
(MDOs) in the U.S. combine training and
microfinance, often without the same group focus,
but some just do training.
 544 MDOs in 2002
 191 engage in lending
PPA786, Class 20: Financial Capital Programs
Schreiner and Woller, World Development 2003
PPA786, Class 20: Financial Capital Programs
• Evaluation of Microenterprise (Schreiner & Woller)
▫ Two random-assignment studies of US
microenterprise programs find small impacts.
▫ One study found that access to microenterprise
programs doubled the rate of movement from
unemployment to self-employment, but the absolute
increase in the number people who moved was only
about one per 100.
▫ Another study aimed at recipients of public assistance
found that access to microenterprise programs would
move, at most, about one person per 1,000 from public
assistance to microenterprise.
PPA786, Class 20: Financial Capital Programs
• Limits to Group Lending in the United States
▫ 1. The poor don’t have much social capital.
▫ 2. The poor are diverse in skills and interests.
▫ 3. It is hard to enforce joint liability.
▫ 4. Groups break down because even poor people
can get loans through their credit cards.
PPA786, Class 20: Financial Capital Programs
• Conclusions about Microenterprise
▫ As Schreiner and Woller (2003) put it:
 Microenterprise is a good choice for a few
extraordinary poor people, but wage jobs, additional
education, and job training are still the most
common paths out of poverty.
PPA786, Class 20: Financial Capital Programs
• Individual Development Accounts (IDAs)
▫ An IDA is a savings account that matches
payments by low-income households when the
money is taken out for certain purposes, such as
buying a home, starting a business, or paying for
college.
▫ IDAs are surprisingly popular, with 400 programs
in the U.S. (2006) with 44,000 accounts
supported by governments, foundations, and
corporations.
PPA786, Class 20: Financial Capital Programs
• The Tulsa IDA Experiment
▫ An IDA program in Tulsa matched household
withdrawals for home purchase at the rate of 2:1
and withdrawals for business or education at the
rate of 1:1.
▫ Up to $750 could be matched per year for 3 years,
so a person could have $6,750 to buy a house.
▫ This was evaluated with a random-assignment
design.
PPA786, Class 20: Financial Capital Programs
• Tulsa Results (Mills et al., Journal of Public
Economics 2008)
▫ This team, which included a professor
(Englehardt) and a graduate student from
Syracuse found
 No significant impacts on the holdings of subsidized
assets.
 A significant positive impact on homeownership
among renters, accompanied by a significant
reduction in other assets (= time-shifting of home
purchase decision?)
PPA786, Class 20: Financial Capital Programs
• Tulsa Results, Continued
▫ “Despite strong incentives, regular interaction between
program staff and treatment group participants, and
the presence of a strongly motivated group of savers,
we find generally weak sample-wide effects of the
Tulsa IDA program on household behavior. There are
no sample-wide impacts on holdings of subsidized
assets.
▫ The strongest subgroup effect occurs for
homeownership among renters. At 7–11 percentage
points, this effect is economically and statistically
significant, but it is offset to some extent by a
reduction in non-retirement financial assets and could
be upwardly biased due to short-term time-shifting of
home purchases.”