Los Angeles is the second-largest city in the country, and its economy moves steadily, albeit slowly, as it awaits new policies from City Hall to rejuvenate much-needed stronger economic growth and quality jobs.

The city faces two distinctive paths. One is the tired, well-worn one that we've heard over and over for the past 10 years, which goes something like this:

The local economy is adrift, with limited vision from the public sector. The hope of the city's future rests on the shoulders of its numerous small entrepreneurs, who can flourish without help or direction from government. Inspiring? Yes. Realistic? Probably not.

Another path is much more challenging because it relies on an effective partnership between the public and private sectors. It calls for local leaders to fully utilize the city's educational institutions and technology base to change both the workforce and businesses in ways that make them competitive in global and well as national markets. It calls for greater emphasis on attracting and retaining larger firms, which are anchors for the local economy. It calls for strategies that allow businesses to take advantage of the city's diversity. And it requires getting smarter about workforce training, tailoring programs to the needs of growing industries.

To take this more challenging route, however, civic leaders must be willing to accept the fact that what we're doing now simply won't cut it in an era of global outsourcing. For Los Angeles to return to the economic dynamism of the 1970s and 1980s, it must make the most of its strengths, ranging from the entertainment industry to world-class universities and medical centers. To put it bluntly, business-as-usual is a recipe for failure.

So what must be done to succeed? After studying the Los Angeles economy for the past year, we have some nuts-and-bolts suggestions.

Large companies are an asset, not a burden. Companies with more than 500 employees remain the strongest contributors to the local economy, employing almost one-third of the workers who live in the city. Any significant job growth in Los Angeles must involve both these incumbent powerhouses and mid-sized businesses with the ability to grow. City leaders should be flexible in tailoring incentives to keep them here.

Help small businesses grow into larger businesses. The economic impact of small businesses is greatest when they have plenty of room to expand. While small businesses (fewer than 10 employees) account for nearly three-quarters of the city's total firms, they employ less than 12 percent of the city's total workforce. To help them grow, the city must make it easier for smaller firms to attain needed information such as labor-market data improve their ability to gain access to needed capital, and create effective business networking and mentoring programs that will benefit all small firms.

Match workforce training programs to the needs of local businesses. What good does it do to train someone how to, say, repair telephone systems if demand for the service in Los Angeles is shrinking? Rather than addressing the limited skills of the city's workforce through unselective training initiatives, programs should tailored to what local businesses say they need and targeted at industries with the most long-term growth potential.

Build a technology-based economy. The city must leverage its world-class education and research institutions for faster, higher-quality economic development. The city must incorporate these important assets by making it easier to build science parks and other facilities that will encourage the conversion of research discoveries into economic wealth.

Address the reasons why so many businesses remain outside the formal economy. One of the largest, fastest-growing sectors of the Los Angeles economy is composed of the informal, or "underground," economy. Although a significant portion of the informal economy involves undocumented workers an issue the city alone cannot solve many businesses remain outside the formal economy for other reasons. These include a cumbersome business-license process, a lack of assistance for those trying to move out of the informal sector and bureaucratic roadblocks that make it too expensive and time-consuming to move into the legitimate economy.

Establish reliable access to capital for small and medium-sized businesses. To harness the growth potential of the diverse entrepreneurs in the city, civic leaders must ensure that small businesses are able to grow to become medium- and large-sized businesses. The city must help implement proven methods to provide capital to allow small businesses to reach their potential.

None of this will be easy. But the alternative to serious reform is to lose even more ground to cities such as San Francisco and San Diego not to mention states moving quickly in this direction, including Florida and North Carolina, or, for that matter such countries as South Korea and Singapore. Los Angeles has become complacent. Maybe it's the weather. But good climate will not be our economic salvation.

The keys to future prosperity are a well-trained workforce, knowledge-based industries and an environment that helps small businesses grow and keeps medium-sized and large businesses in town.

*Kevin Klowden is a research economist and Perry Wong is a senior research economist at the Milken Institute, a non-profit economic think tank based in Santa Monica. To view the Milken Institute report on the L.A. economy, visit www.laeconomyproject.com .

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