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An evidence-based development approach: Using grants and affordable loans to recover from COVID-19

May 14, 2020 / Kevin Dick, Jamie McCall and Emily Stallings / Economic Development, Small Business, Theory to Practice

As the North Carolina economy continues to reel from COVID-19, the need for innovative policy is more important than ever before. In this post President and CEO Kevin Dick, Vice President of Research Jamie McCall, and Development Director Emily Stallings explore how grants can be used to help the state’s Main Street firms recover from the pandemic. To apply for or donate to Raleigh’s COVID-19 Relief Grant, click here. To learn more about CSBDF’s research and policy analysis work, click here.

Local Policy Innovation for Small Businesses

At CSBDF, we believe that evidence-based practices are key to community development. In truth, the practice of development for both governments and community institutions can be a messy and imperfect affair.[i] Strategies to promote economic growth are often carried out in a rushed manner,[ii] with limited evidence for their effectiveness,[iii] and with no meaningful program evaluation.[iv] Bucking that trend is not easy, but Carolina Small Business has long sought to shine a light on this topic through both rigorous peer-reviewed scholarship and transparent program evaluation.

In the wake of the COVID-19 pandemic, there is a need for innovative policy approaches that break the mold of what institutions normally do to respond to a disaster.[v] But what does it mean to be “innovative” amidst this crisis? Though the data are limited, there is strong evidence for a two-pronged approach. First, small business assistance for COVID-19 should leverage community social capital networks.[vi] Second, research suggests that the most comprehensive responses to small business disaster recovery must include both loans[vii] and grants.[viii]

Raleigh’s Small Business COVID-19 Relief Fund

This week, we are proud to launch an initiative that is emblematic of all these qualities. The City of Raleigh’s COVID-19 Relief Fund program, crafted in partnership with Carolina Small Business, represents best practices in this area of disaster recovery. The program offers grants of up to $10,000 for small businesses that have suffered severe revenue losses due to the pandemic.

We’re also proud to share how this initiative has received swift and generous support from the private sector. Within two weeks of the announced partnership Bank of America, Biogen Foundation, Duke Energy, Engineered Tower Solutions PLLC, Leith Toyota, North State Bank, PNC Foundation, Truist,  and Wells Fargo have collectively made an investment of $240K to the fund. We think this level of support demonstrates a collective commitment from Main Street supporters across the private sector to ensuring Raleigh’s small business community can recover.

Lets Continue the Momentum

As North Carolina begins the slow process of re-opening, we have encouraged policymakers to consider similar initiatives across the state. It would be easy for us to claim that what all small businesses need affordable is capital. After all, the data suggest that affordable lending is critical for small and medium-sized business in the wake of a disaster – as long as the financing is structured appropriately to avoid causing inadvertent economic damage.[ix]  In many ways the administration of grants can be more complex. In particular, grant aid for small business must be administered in a way that is in line with state law and in a manner which demonstrates good stewardship of public funds. But ultimately, the amounts of money most businesses need to recover from a disaster are usually far too large to be provided by grants alone.

Admittedly, the use of grant-based aid to small businesses is an area of significant debate. There simply isn’t sufficient data to do things like measure the relative effectiveness of grants versus loans in a disaster recovery context. At both the state and federal level, most disaster-based recovery programs for small businesses are loan-based. There are almost no historical data on small business disaster recovery grants have fared in terms of their development impact (and as such, we have limited data to draw conclusions from)  Arguments for the use of grants tend to be based on economic development theory and cite the disproportionate economic shock that disasters often have on small business operations. It is difficult to truly estimate how many small businesses may permanently close due to COVID-19. But if we were to consider how Main Street employers typically fare in large-scale natural disasters, permanent closure is a real risk. In the wake of Hurricane Katrina, for example, 1 in 10 businesses never even reopened. And many more re-opened, only to later fail.

We also know that there can be no single economic development prescription for every community. Economic development research shows that “place matters.”[x] Put simply, we cannot disentangle development policy from an area’s geographic, institutional, and economic history.[xi] The data hints at how a mix of grants and loans is important for disaster recovery, but there is no single mix of programs that will work everywhere. Some areas will benefit more from programs that primarily use loans, while others will see better results when utilizing mostly grants. As a state-wide community economic development institution, Carolina Small Business can help local municipalities determine what mix is right for their needs.

As the economic fallout from COVID-19 reverberates across the state’s economy, the need for innovative policy making is stronger than ever. Whether it be through grants or loans, CSBDF is proud to put evidence-based approaches into action with our public sector partners across the state. Small businesses are an engine of growth and a pillar of the region’s economy, and their preservation is critical for the state’s economic recovery.[xii]  As we navigate the complex economic reality that confronts us in the months and years to come, putting evidence-based development theory into practice will help ensure small businesses thrive.

References

[i] Jonathan Q. Morgan, Michele M. Hoyman, and Jamie R. McCall, “Everything but the Kitchen Sink? Factors Associated with Local Economic Development Strategy Use,” Economic Development Quarterly 33, no. 4 (November 1, 2019): 267–78, https://doi.org/10.1177/0891242419857152.

[ii] Herbert J. Rubin, “Shoot Anything That Flies; Claim Anything That Falls: Conversations with Economic Development Practitioners,” Economic Development Quarterly 2, no. 3 (August 1, 1988): 236–51, https://doi.org/10.1177/089124248800200304.

[iii] Margaret E. Dewar, “Why State and Local Economic Development Programs Cause so Little Economic Development,” Economic Development Quarterly 12, no. 1 (February 1, 1998): 68–87, https://doi.org/10.1177/089124249801200106; Maryann Feldman et al., “The Logic of Economic Development: A Definition and Model for Investment,” Environment and Planning C: Government and Policy 34, no. 1 (February 1, 2016): 5–21, https://doi.org/10.1177/0263774X15614653; Michael Storper and Michael Manville, “Behaviour, Preferences and Cities: Urban Theory and Urban Resurgence,” Urban Studies 43, no. 8 (July 1, 2006): 1247–74, https://doi.org/10.1080/00420980600775642; Harold Wolman and David Spitzley, “The Politics of Local Economic Development,” Economic Development Quarterly 10, no. 2 (May 1, 1996): 115–50, https://doi.org/10.1177/089124249601000201.

[iv] T. J. Bartik and R. Bingham, “Can Economic Development Programs Be Evaluated?” (WE Upjohn Institute for Employment Research, 1995); Timothy Bartik, “Evaluating the Impacts of Local Economic Development Policies on Local Economic Outcomes: What Has Been Done and What Is Doable?,” in Evaluating Local Economic and Employment Development: How to Assess What Works among Programmes and Policies, ed. OECD (Paris, France: OECD, 2004), 113–41, https://doi.org/10.1787/9789264017092-en.

[v] Maria I. Marshall and Holly L. Schrank, “Small Business Disaster Recovery: A Research Framework,” Natural Hazards 72, no. 2 (June 1, 2014): 597–616, https://doi.org/10.1007/s11069-013-1025-z.

[vi] Robert Agranoff and Michael McGuire, “Multinetwork Management: Collaboration and the Hollow State in Local Economic Policy,” Journal of Public Administration Research and Theory 8, no. 1 (1998): 67–91, https://doi.org/10.1093/oxfordjournals.jpart.a024374; M. Warner, “Building Social Capital: The Role of Local Government,” The Journal of Socio-Economics 30 (2001): 187–92.

[vii] Kristle Cortés, “Rebuilding after Disaster Strikes: How Local Lenders Aid in the Recovery,” Working Paper (Cleveland, OH: Federal Reserve Bank of Cleveland, November 2014), https://www.clevelandfed.org/newsroom-and-events/publications/working-papers/2014-working-papers/wp-1428-rebuilding-after-disaster-strikes-how-local-lenders-aid-in-the-recovery.

[viii] Justin Gallagher, Daniel Hartley, and Shawn Rohlin, “Weathering an Unexpected Financial Shock:  The Role of Cash Grants on Household Finance and Business Survival Following a Natural Disaster” (Chicago, IL: Federal Reserve Bank of Chicago, 2019), https://www.chicagofed.org/publications/working-papers/2019/2019-10; Bruce R Lindsay, “Considerations for Implementing a Small Business Disaster Grant Program,” R45554(Washington, DC: Congressional Research Service, 2019). https://crsreports.congress.gov/product/pdf/R/R44412; [1] Leigh T. Graham, “Permanently Failing Organizations? Small Business Recovery After September 11, 2001,” Economic Development Quarterly 21, no. 4 (November 2007): 299–314, https://doi.org/10.1177/0891242407306355; Suresh De Mel, David McKenzie, and Christopher Woodruff, “Enterprise Recovery Following Natural Disasters,” The Economic Journal 122, no. 559 (March 1, 2012): 64–91, https://doi.org/10.1111/j.1468-0297.2011.02475.x.

[ix] Meri Davlasheridze and Pinar C. Geylani, “Small Business Vulnerability to Floods and the Effects of Disaster Loans,” Small Business Economics 49, no. 4 (December 1, 2017): 865–88, https://doi.org/10.1007/s11187-017-9859-5; Anna Josephson and Maria I. Marshall, “The Demand for Post-Katrina Disaster Aid: SBA Disaster Loans and Small Businesses in Mississippi,” Journal of Contingencies and Crisis Management 24, no. 4 (2016): 264–74, https://doi.org/10.1111/1468-5973.12122.

[x] Peter Dreier, John Mollenkopf, and Todd Swanstrom, Place Matters: Metropolitics for the 21st Century, 2nd ed. (Lawrence, Kansas: University Press of Kansas, 2013); Matthew Freedman, “Place-Based Programs and the Geographic Dispersion of Employment,” Regional Science and Urban Economics 53 (July 1, 2015): 1–19, https://doi.org/10.1016/j.regsciurbeco.2015.04.002; Lawrence Hamilton et al., “Place Matters: Challenges and Opportunities in Four Rural Americas,” Reports on Rural America (Durham, NH: Carsey Institute, University of New Hampshire, July 16, 2008), https://scholars.unh.edu/carsey/41.

[xi] B. Guy Peters, Jon Pierre, and Desmond S. King, “The Politics of Path Dependency: Political Conflict in Historical Institutionalism,” The Journal of Politics 67, no. 4 (November 1, 2005): 1275–1300, https://doi.org/10.1111/j.1468-2508.2005.00360.x; Ron Martin and Peter Sunley, “Path Dependence and Regional Economic Evolution,” Journal of Economic Geography 6, no. 4 (August 1, 2006): 395–437, https://doi.org/10.1093/jeg/lbl012; Laura Ryser et al., “Path Dependency or Investing in Place: Understanding the Changing Conditions for Rural Resource Regions,” The Extractive Industries and Society 6, no. 1 (January 1, 2019): 29–40, https://doi.org/10.1016/j.exis.2018.10.009.

[xii] Donald Bruce et al., “(Small) Business Activity and State Economic Growth: Does Size Matter?,” Regional Studies 43, no. 2 (March 1, 2009): 229–45, https://doi.org/10.1080/00343400701808915; Roy Thurik and Sander Wennekers, “Entrepreneurship, Small Business and Economic Growth,” Journal of Small Business and Enterprise Development 11, no. 1 (January 1, 2004): 140–49, https://doi.org/10.1108/14626000410519173.