There is a great deal of literature today on the issue of economic disparity or imbalance. That is, the disparity between the “haves” and the “have nots,” government services provided to well off communities vs. those that are at the lower end of the income scale, as well as differences in growth rates between various areas of a country.
Some recent statistics depicting this situation illustrate the very real effect this has on the overall growth of an economy. While most analysts zero in on education, access to good jobs and the like as the most significant factors to be addressed in trying to solve this challenge, I believe that other considerations come into play as well.
For example, as representatives of a number of U.S. states, we have often said that one of the real obstacles to tech growth is the unavailability of venture capital funding in the center of the country as compared to what is available on both coasts. After all, without venture capital, the tech community would see stagnant growth and, in most cases, will move to where funding is available.
A recent article in Crain’s Cleveland Business (21 December 2017) put this in quantitative terms. Steve Case, Co-Founder of America On Line, points out there that the venture capital invested in companies in each of five states studied (Indiana, Michigan, Ohio, Pennsylvania and Wisconsin), was 1% of the total value of all venture capital invested in the U.S. in 2016. Comparatively, California companies received 50% of all venture capital. Effectively then California gets venture capital inflow every week what some of these large states get every year.
He goes on to say: “The job creation engines in those other states are sputtering, and that’s why people living in those states are frustrated and anxious about the future. That’s why it is so important to level the playing field and have a more inclusive innovation economy.”
Israel is one of the countries that successfully addressed this issue in the early 1990s by seeding four drop-down venture capital funds with an initial investment of $25 million each, with the express intent of exiting those funds when the private sector was ready to take over. At the time this program was put in place, there were just two venture capital funds operating in Israel. Ten years later the government had exited all of those funds and there were almost 100 private venture capital funds in operation in the country. That was a major catalyst in the growth of Israel’s high tech community and a model that U.S. states could certainly emulate.
Of course, the impact of the economic imbalance is reflected in political influence as well. The Center for Responsive Politics, which tracks political contributions in the U.S., provides another example of the imbalance as it affects political clout. They show that the sum of political contributions from people living in one U.S. Zip Code, 10022, for example, is 564 times greater than what comes from the average zip code in the U.S. For the record 10022 is in Manhattan, and covers the area from 49th to 60th street, between Fifth Avenue and the East River, which is the 5th wealthiest zip code in the U.S. That kind of clout is also a significant factor contributing to the imbalance and one that is very difficult to address.
In short, perhaps the real challenge for society is to understand the depth of the disparities and internalize them. Only then can society begin to deal with the issue and craft solutions that are concomitant with the magnitude of the problem. If that can be accomplished, then economic growth will become a realizable goal across an entire nation, rather than be isolated in specific locations.
Sherwin Pomerantz is president of Atid-EDI Ltd., an economic development consulting firm with 26 years’ experience in assisting overseas companies and public entities in their export promotion and foreign direct investment attraction efforts.