Miracle by Default

Why the City of Angels works

Vladimir Volokh has seen the planned future—and knows it doesn't work. As a computer scientist in his native Kiev, he labored under conditions dictated by the state, down to his salary and ideologically "correct" technology. Frustrated with both the system and the pervasive anti-Semitism in his native country, Volokh emigrated to America in 1975, ultimately settling in Los Angeles.

At first, it wasn't easy. Barely speaking English, he commuted two hours each way by bus to his $3.50 an hour job as a low-level programmer. But if Vladimir was having a hard time, his son, Eugene, thrived in the new environment. Coached by his mother, Anne, who had taught English in the Soviet Union, Eugene developed into a technical prodigy, graduating at age 15 from UCLA.

Along the way, Eugene developed a complex software-protection program for use with Hewlett-Packard minicomputers. Using this program as its basis, in 1980 the family formed Vesoft—with Vladimir as president, Eugene as top technologist, and Anne serving as bookkeeper for the venture while running a movie magazine on the side. Today the company enjoys over $5 million in annual sales, and last year Inc. magazine ranked it among the 500 fastest-growing small private companies in America.

"In Russia," Vladimir recalls, "planning and ideology gets in the way of technology. But when I got to L.A., it was amazing to see that people do what they want here. In Russia, if you're an engineer, your life is set. People come here to do what they want."

Like the Volokhs, millions have immigrated to Los Angeles, a city that one out of eight foreign-born Americans now calls home. And to a remarkable degree, immigrants have succeeded here with precious little intervention from government. Rather than a triumph of organization and planning, Los Angeles, as the late futurist Hank Koehn once put it, represents a "miracle by default."

To a large extent, however, this is a miracle little appreciated or understood by the leading lights of the Northeast-dominated media. Part of the problem lies with the chaotic nature of the Los Angeles economy. Unlike the "technopolis" model so beloved by public policy types in Europe, Japan, and the United States, there is no real university-led high-tech sector, as in Boston or the San Francisco Bay area. There also is no local industrial policy, just an efficient city-owned water and power grid—and the increasingly congested freeways—providing an infrastructure for entrepreneurs; but no direction, or coercion.

Prejudice also plays a part in the failure to recognize L.A.'s economic dynamism. Many ignore the power of the real L.A. because it violates their conventional view, which remains that of "Tinseltown." Los Angeles-based reporters for eastern media, for instance, often are hounded into churning out fluff pieces about the entertainment industry and the usual array of "California nut" stories. The idea that Los Angeles should be covered as a major, perhaps the major, economic center of the continent is regarded as too absurd to even consider.

For instance, Los Angeles is now the nation's leading manufacturing center—it has twice as many factory jobs as New York—but few national media assign reporters to cover the city's burgeoning industrial sector. "As far as my bosses in New York are concerned, industry is something that takes place in the Midwest or New England," one national network producer complains. "I suggest we cover something like the garment or specialty steel business here, and all I get is a little pat on the head."

Much the same pattern holds for technology. Reading the New York Times, Wall Street Journal, or even Forbes, one would suspect that the nation's high-technology industries are centered in the Boston and Silicon Valley areas. Yet in reality Southern California leads its northern neighbor in nondefense high-technology employment and sales; it produces more than twice as much, measured in sales, as the much-ballyhooed Boston area.

Another reason the public policy elites reject or ignore this model is that the highly decentralized pattern of Los Angeles growth violates their traditional views about economics. Taking the Galbraithian point of view, they see "real" economies as dominated by giant corporations, labor unions, and other "organized" interest groups. But L.A. is not like New York, Chicago, or even Cleveland. It has relatively few Fortune 500 companies, the kind that are easy for the Wall Street-oriented business media to follow.

Los Angeles's real strength lies with people like the Volokhs, entrepreneurs who start out with an idea and build their own companies. Its rate of new business formation is nearly 30 percent higher than New York's. And in 1988 Los Angeles County boasted 8 companies on the Inc. list of the nation's 100 fastest-growing public companies and a remarkable 24 of that magazine's 500 fastest-growing private firms. New York, in contrast, generated only three of the public and six of the private firms on the Inc. lists.

Boosted by these small, growing firms, Los Angeles will pass New York as the nation's premier economic region by the year 2000, producing more than twice as many new jobs, predicts the U.S. Department of Commerce. Even in finance, Los Angeles is catching up. Between 1980 and 1985, deposits in L.A.'s banks and thrifts jumped 60 percent while those in New York declined. "This is where the future will be exciting," predicts Citicorp Vice Chairman James D. Farley, who is based in Los Angeles.

Farley, among others, believes that the largest factor in L.A.'s favor grows out of its close ties to both Asia and Latin America. One part of this connection lies in demographics. Today only one-fifth of the Los Angeles area's population is of Northern European descent. By the early 21st century, nearly three in five people living here will be non white.

Many view this minority upsurge with alarm. But in economic terms, immigration has been a strong factor in L.A.'s growth. Hispanics, for instance, are a key to the city's rapid industrial expansion, holding down half the city's manufacturing jobs.

Latins also contribute as consumers and entrepreneurs. Last year, for instance, their purchasing power was larger than that of metropolitan St. Louis. Already there are 30,000 Hispanic-owned businesses in Los Angeles County, the most of any metropolitan area in the nation, with sales in excess of $1.7 billion.

The impact of the other major immigrant group, Asians, has also been profound. Southern California boasts the largest Asian population in North America, with more than 1.2 million people from the various Pacific countries. This is more than twice the number in the San Francisco area and three times that of New York. Their economic and technological contributions have far outweighed their numbers. From the Koreatown section near downtown to suburban Monterey Park, Asian entrepreneurs have been doing their own ad hoc form of "urban renewal," turning once tepid or even crumbling neighborhoods into thriving commercial centers.

"Immigration is increasingly the key, and Los Angeles has both the immigrants and their trade," notes George Stemlieb, regional growth expert at New Jersey's Rutgers University. "There's nothing wrong with New York that one million Chinese wouldn't cure."

The presence of these large Asian populations also has solidified Los Angeles's position as the chief entrepôt for trans-Pacific trade. No other region in the nation has benefited more from the upsurge in Asian trade—which now accounts for over 50 percent more trade than U.S. trans-Atlantic commerce. Already Los Angeles is the nation's leading port city, outstripping New York in dollar volume. And this pattern should accelerate in the 1990s, when trade with Asia is projected to grow to twice that with Europe.

And there is no doubt that Asians have decided to make Los Angeles the "eastern capital" of the expanding Pacific economic zone. Korean and Taiwanese companies are heavily clustered in areas of both Los Angeles and Orange counties. And leading Japanese firms, including 8 of the 9 leading automakers and 5 of the 13 largest banks, have made Southern California the chief base for their U.S. operations. Today nearly 600 Japanese firms operate in Los Angeles, almost twice as many as in New York.

"Los Angeles is the future of America," explains Tagayi Kobiyashi, president of Shuwas Investment Company, a firm with over $2.8 billion in American real estate, 70 percent of which is in Los Angeles. "It is the city with the greatest possibilities. Business is more dynamic here than in Tokyo."

Such attitudes have helped create a mood among Los Angeles leaders in sharp contrast to the sort of angst about Asia now common among eastern elites. Many Southern California business people regard Asia's ascendancy not as a threat, nor merely as a chance to make money, but as an opportunity to seize national economic leadership.

"Los Angeles is a very laissez-faire city," explains Jack Kyser, chief economist for the Los Angeles-area Chamber of Commerce. "It's okay to make money any way you can, as long as it's more or less legal. I guess we've still got the animal spirits about business. There's a touch of the bandito in all of us, and we see the Japanese as people out to make a buck and so are we, a match made in heaven." In many ways, this receptivity to the Japanese reflects a long-standing faith—going back to the turn-of-the-century dreams of such early city fathers as Los Angeles Times publisher Harrison Gray Otis and railway magnate Henry Huntington—that the city's "manifest destiny" was inextricably linked with the growth of Asia.

And certainly Asian trade helped make Los Angeles's economy during the 1980s arguably the most dynamic of any major city in the advanced industrial world (growing at nearly a 4 percent annual clip through the 1980s). In the 1990s this outside stimulus, combined with an almost unbridled individualist spirit, will see Los Angeles's emergence, whether the eastern establishment likes it or not, as the next economic capital of America.

Joel Kotkin is West Coast editor of Inc. magazine and coauthor, with Yoriko Kishimoto, of The Third Century: America's Resurgence in the Asian Era (Crown).