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Detroit’s US economy relevance

August 31, 2015
Editor(s): Heath Gilham
Writer(s): Max Yang, Rachel Lau, David Lou, Kevin Kingsley

After a 50 year economic decline, which resulted in bankruptcy, Detroit is on the up after diversifying its industrial composition.

Detroit, once a bustling metropolis of activity, is now a crippled and dilapidated city falling into economic ruin, abandoned by the American economic environment in which it had ironically thrived within. It is a classic example of a municipality that has both benefited from economic advances, yet suffered from the most significant economic advance of them all: Globalisation.

Detroit has had a colourful history indeed, after bursting into significance in 1903 when Henry Ford founded the Ford Motor Company. From then on, Ford revolutionised the labour industry, astonishing the world when he implemented a $5 daily salary in 1914, equivalent to $118 in today’s currency, a wage that was more than double the average rate at the time. Ford’s policy proved fruitful, with the best mechanics being led to Detroit to lend their human capital and expertise to the cause, and thus accelerating the growth of industrial workers in Detroit resulting in a doubling of the population between 1910 and 1920.

Regarded as the world’s automotive centre, the city directly symbolised the American automotive industry and capitalised on the rising need for automobiles. Detroit’s population growth had risen ten-fold in 50 years, and it was rightfully known to be the “golden age” of American invention.

Detroit began to prosper after WWI, driven by the rise of the auto industry.  In the 60’s, Detroit had the highest per-capita income and at the time of filing for bankruptcy in 2013, it had total debts of $20 billion or more than $25,000 per resident.

The fall of Detroit has occurred over the last 60 years due to strong foreign competition in the automobile industry. For too long, Detroit relied on the auto industry alone without diversifying into other industries. Rising costs of production in terms of wages (due to powerful unions) and the competition from imported cars that offer cheaper and more fuel efficient cars contributed to, and accelerate the downfall. The Japanese auto imports competed directly with Detroit automakers while the market share for the high end quality cars was dominated by the Europeans. Ironically, the increasing innovation and automation in car technology has rendered little differentiation to car manufacturing and contributed to job losses.

The demise of Detroit can also be attributed to the oil crises in the 70’s and the weakness of USD after the GFC (due to quantitative easing) which saw the escalating oil prices until recently as US consumers switch to more fuel  efficient  imported cars. Detroit’s fate can be blamed on the political will that put off hard decisions to restructure and manage costs to improve cost efficiency and outputs.

Corruption, cronyism and scandals were also evident in the political system which undermined the economic confidence. Racial strife was causing riots and tensions since the 1950’s culminating in one of the most violent revolts in the 20th century, the 1967 Detroit race riot. Lasting five days and nights, the brutal riot resulted in over 40 deaths, 1100 people injured and 7200 arrests. The escalating violence and riots led to an exodus of white residents and loss of talents. The housing prices plunged reflecting the slowing demand as people left Detroit for greener pastures. While the auto industry faded, crime rate rose and illegal drug business boomed, which destroyed the once vibrant economy.

Detroit’s economy can be seen as directly linked with the manufacturing industry, more specifically, the automotive industry. With its growth, Detroit saw huge financial growth; however with the fall due to globalisation, Detroit was hit hard. Even though this industry was seen as a crucial part of any city, the hit to the sector affected Detroit more in comparison to other countries.

Of course other cities had their share of unemployment; however Detroit suffered more because unlike other cities, Detroit placed a stronger dependence on this industry, to the extent that the city lost more than 53% manufacturing jobs.

In comparison to Detroit’s fallen economy, the United States’ most populated city, New York City, having an estimated population of nearly 8.5 million people, was not affected as much. This was due to NYC investing in different sectors which allowed it to become the nation’s most important port and financial center. New York adapted to changes over time, managed to capitalise the markets and is currently showing tremendous growth. Based on the second quarter of this year alone, the private sector added 20,300 jobs with a suspected record of 4.2 million jobs by the end of 2015. Hence those economies that did not rely heavily on the manufacturing sector were not affected as much from the fall.

Having experienced the largest municipal bankruptcy in US history, Detroit has slowly stabilized its economy with house prices increasing by 23% and unemployment decreasing by 9% since filing for bankruptcy in 2013. These developments are leading to a significant increase in investors, some seeing a return of investment above 17%.

The main cause of economic recovery in the past two years is the increase in small start-ups that have arisen after the collapse of traditional manufacturing companies. The growth of small business has offered the city a risk-free and sustainable method to increase employment, production and stimulate economic recovery. In the past 12 months the number of jobs provided by small business has increased significantly, as evidenced by the city having a small business jobs index of approximately 103 which indicates a growth in small business employment. Growth in Detroit’s small business sector was the 2nd fastest in the United States in terms of employment opportunities, signaling the intent to diversify their economy rather than having a single industry being the main source of employment.

Detroit’s recovery has also been supported by investments from large corporations such as JP Morgan Chase, aiming to improve workforce participation and career mobility. With consistently high rates of structural unemployment being created by former automotive sector workers lacking skills to find employment in different industries, JP Morgan aimed to develop workforce readiness within the community. In April 2015, the company invested in the training provider focus: HOPE to align training with approximately 6,000 middle-skilled job openings per year. This leads to a reduction in the natural rate of unemployment, supporting Detroit’s economic recovery.

In order to attract more investors, security concerns and crime rates have also been allayed. The 78,000 abandoned structures, breeding sites for prostitution and drug dealing, have been addressed, with the Detroit Blight Authority investing $500,000 to demolish blight. JP Morgan has also invested 5 million in restoring some of these structures into accommodation. The reduction of these buildings in crime ravaged areas combines with the increase in employment and education to combat security issues.

By diversifying sources of employment, reducing the mismatch of skills to job opportunities and refurbishing past breeding sites for crime, Detroit’s economy is becoming self-sufficient, the first step in a long journey to recovery.

What can be clearly seen is the extent to which Detroit relied on its automotive industry and how it has led to its stagnation. Whilst it held an absolute advantage in the first half of the 20th century, its overdependence on automobiles meant that the city and its labour force was left jobless and one-dimensionally skilled while the rest of the world quickly caught up with the US.

However, all hope is not lost yet. What is sparking this rebirth of an old battered city is the appearance of tech Startups, drawing from its traditional engineering heritage. Small business forms the cornerstone to every economy, and Detroit is beginning to rebuild from its foundations.

Despite the magnitude of its ruin, there is just the faintest hint, the weakest whisper, that Detroit can recapture that pride that drove them in the early 20th century, and can one day return themselves to their former position as the Kings of Innovation.

References

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Thomas H. Klier (2009), From tail fins to hybrids: How Detroit lost its dominance of the U.S. auto market Retrieved from https://chicagofed.org/~/media/…/ep-2qtr2009-part1-klier-pdf.pdf
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The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Heath Gilham
Editor
Max Yang
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Rachel Lau
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David Lou
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Kevin Kingsley
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